The Hidden Power of SKU Rationalization
1. SKU proliferation – an insidious business issue
Many industrial, semiconductor, and consumer packaged goods manufacturers end up with bloated product catalogs — SKUs proliferate as new products are introduced but legacy products are not discontinued.
Hidden costs accumulate: maintenance engineering costs, supply chain complexity, suboptimal negotiation leverage with suppliers, excess inventory, pricing inconsistency, diluted marketing/sales focus, ultimately leading to customer dissatisfaction and suboptimal revenue/profit performance.
In most cases, SKU sprawl isn’t strategic — it’s an accident.
“What starts as a growth lever often ends as a burden.”
2. Where It Goes Wrong
Misinterpreted data: Margins may look good, but fail to account for complexity cost. And without solid understanding of the hidden costs, SKU rationalization doesn’t get the attention it deserves.
Internal silos: Endless debate between functions, e.g., resulting from misaligned priorities and targets. Sales wants more options, or a specific customer seems to like a SKU, but finance sees it as negative/low margin SKU. Operations has a different view based on inventory and how the SKU fits in the overall puzzle. Marketing doesn’t see eliminating old SKUs as a priority while being stretched on new product support.
If product design engineers are not encouraged to use standard parts/components, they may choose parts ad nauseum from various distributor catalogs/suppliers creating parts proliferation.
Product teams are rewarded for launches, not streamlining.
3. What Good Looks Like
Clear visibility into SKU-level profitability (volume, margin, complexity burden).
Systematic SKU rationalization cadence every 2-3 years – it’s like periodic housekeeping, sponsored by the BU General Manager.
Large organizations with disciplined SKU management have seen real benefits. Costco, for example, limits its warehouses to ~4,000 SKUs — far fewer than the 30,000 carried by typical supermarkets — allowing buyers to focus on volume and supplier leverage. Walmart removed 10–15% of underperforming SKUs in a major cleanup, significantly improving inventory turns. Dollar General and CPG giants like Unilever and Hasbro, have cut hundreds to thousands of SKUs to streamline operations and boost margins. In one publicized example, an industrial manufacturer eliminated over 40% of SKUs and nearly doubled EBIT while freeing up 10+% of inventory. (Sources: Public statements and reporting from Costco, Walmart, Retail Dive, CNBC, and other trade publications)
A study of Caterpillar’s backhoe-loader line found that they reduced configurations from nearly 38,000 to just 135, thereby streamlining operations.
(Based on academic research by Carnegie Mellon and University of Washington)Hewlett-Packard deployed ROI-based SKU screening and a ‘Revenue Coverage Optimization’ tool to streamline offerings and improve forecasting. (As described in published academic literature)
4. Representative Case Example
In one case, a manufacturer had over 7,000 active SKUs. After conducting a SKU value segmentation and complexity-adjusted margin analysis, they sunset ~30% of SKUs — freeing up supply and maintenance engineering capacity, reducing planning errors, and improving margin by 100+ basis points. Further it set up opportunities for better up-selling and pricing tactics.
5. Closing: Focus Brings Leverage
SKU cleanup isn’t just a cost-cutting move — it’s a margin unlock.
Complexity is silent, persistent, and deeply unprofitable if left unchallenged.
Start with what your customers actually value — and build backward from there.
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