In this article, we explore what SKU analysis is and its importance for your business. We also share our step by step process for effective SKU analysis. Read on to learn more.
What is SKU Analysis?
SKU analysis involves assessing the performance of each product’s unique identifier in your inventory to ensure efficient inventory management and better sales performance. This helps in making informed decisions about stocking, pricing, and marketing.
Example: If a clothing store analyzes SKUs and finds that red T-shirts are selling well while blue ones are not, they might choose to stock more red T-shirts and reduce the number of blue ones to improve profitability.
Advantages of Implementing SKU Analysis
Here are some of the key advantages of employing SKU analysis in your business:
Improved Inventory Management:
SKU analysis helps in maintaining optimal inventory levels. It ensures that you have enough stock to meet customer demand without overstocking, reducing carrying costs, and the risk of stockouts.
Enhanced Demand Forecasting:
By examining historical sales data for each SKU, businesses can make more accurate predictions about future demand. This helps in planning production, procurement, and stock replenishment efficiently.
Better Product Performance Assessment:
SKU analysis allows you to identify which products or variants are top performers and which are underperforming. This insight can guide decisions on marketing, product development, or discontinuation of slow-moving items.
Analyzing SKUs helps in understanding the profitability of individual products. This information can inform pricing strategies, cost management, and resource allocation to maximize overall profitability.
Effective Marketing and Optimized Pricing Strategies:
SKU analysis helps businesses market their products more effectively by identifying popular items among different customer groups and pinpointing price flexibility. By adjusting prices based on these insights, companies can boost sales and profit margins.
Supply Chain Efficiency:
SKU analysis aids in optimizing the supply chain by identifying the demand patterns for each SKU. This can lead to more efficient procurement, production, and distribution processes.
Inventory Turnover Optimization:
SKU analysis helps in identifying slow-moving or obsolete items, allowing businesses to take action to reduce carrying costs and free up capital.
SKU analysis provides data-driven insights, allowing businesses to make informed decisions rather than relying on intuition or guesswork.
10 Steps in Implementing SKU Analysis
Here are our steps for conducting an effective SKU (Stock Keeping Unit) analysis:
1. SKU Identification
Identify each SKU (Stock Keeping Unit) in the product line you wish to analyze. This involves understanding the unique identifier for each item in your inventory.
Example: The company stocks three types of shoes: Sneakers, Loafers, and Sandals. Each has a unique SKU: SNK001, LOF001, SND001 respectively.
2. Historical Sales Analysis
Evaluate the past sales data for each SKU. This helps in understanding how well a product has performed over a specific period.
Example: Over the past year, SNK001 had sales of 5,000 units, LOF001 had 3,000 units, and SND001 had 2,500 units.
3. Inventory Turnover Rate
Calculate the rate at which each SKU sells out and gets replenished. A higher turnover rate indicates good sales while a lower one can indicate overstock.
Example: In six months, SNK001 inventory was sold and replenished 5 times, while LOF001 was only 3 times.
4. Profit Margin Analysis
Determine the profit margin for each SKU. It’s vital to know which products provide the best return on investment.
Example: For every pair of SNK001 sold, the profit is $20, whereas for LOF001 it's $25.
5. Stockout Rate Calculation
Assess how often an SKU runs out of stock. A high stockout rate may indicate underordering or high demand.
Example: SND001 ran out of stock 4 times last year, while SNK001 ran out only once.
6. SKU Segmentation
Categorize SKUs based on their performance, like A (high performing), B (medium), and C (low).
Example: Based on sales and profit, SNK001 is categorized as A, LOF001 as B, and SND001 as C.
7. Forecasting Future Demand
Predict the potential demand for each SKU based on past trends, seasonality, or market research.
Example: Given the increasing trend and upcoming summer season, SND001’s sales are expected to rise by 15%.
8. Cost Analysis
Analyze the various costs associated with each SKU, like procurement, storage, and handling.
Example: Storing a pair of LOF001 costs $2/month due to special storage conditions, whereas SND001 costs only $0.5/month.
9. Customer Feedback and Reviews
Collect and assess feedback for each SKU. Products with higher positive reviews can be indicative of higher demand and customer satisfaction.
Example: SND001 has an average rating of 4.8 out of 5 from 200 reviews, suggesting high customer satisfaction.
10. Decision Making and Action Steps
Based on the gathered data, decide on strategies such as promoting, discontinuing, or revamping an SKU.
Example: Given its high profit and turnover rate, a marketing campaign could be designed to further promote SNK001.
Let's apply the 10 steps of SKU analysis to TechGad, a company that sells electronic gadgets. TechGad recognizes the need to refine its product lineup to streamline offerings and drive greater profitability.
1. SKU Identification:
TechGad identifies each SKU in its product line. For example, they have smartphones, tablets, and laptops with the following SKUs:
Smartphone X: SKU SMX001
Tablet Y: SKU TBY001
Laptop Z: SKU LPZ001
2. Historical Sales Analysis:
TechGad reviews the past year's sales data for each SKU:
Smartphone X (SMX001): 10,000 units
Tablet Y (TBY001): 5,000 units
Laptop Z (LPZ001): 3,500 units
3. Inventory Turnover Rate:
TechGad calculates the inventory turnover rate over the past year:
Smartphone X: 4 times
Tablet Y: 3 times
Laptop Z: 2.5 times
4. Profit Margin Analysis:
They determine the profit margin for each SKU:
Smartphone X: $100 profit per unit
Tablet Y: $80 profit per unit
Laptop Z: $150 profit per unit
5. Stockout Rate Calculation:
TechGad assesses the stockout rate for each SKU:
Smartphone X: Ran out of stock 3 times
Tablet Y: Ran out of stock 2 times
Laptop Z: Never ran out of stock
6. SKU Segmentation:
They categorize the SKUs based on their performance:
Smartphone X: Category A (high performing)
Tablet Y: Category B (medium)
Laptop Z: Category C (low)
7. Forecasting Future Demand:
TechGad predicts potential demand for each SKU based on trends:
Smartphone X: Expected sales increase by 10% due to upcoming holidays.
Tablet Y: Steady demand with a 5% increase during back-to-school season.
Laptop Z: Expected sales to remain constant.
8. Cost Analysis:
They analyze various costs associated with each SKU:
Smartphone X: $10/month for storage and handling.
Tablet Y: $5/month for storage and handling.
Laptop Z: $8/month for storage and handling.
9. Customer Feedback and Reviews:
TechGad collects and assesses customer feedback and reviews:
Smartphone X: Average rating of 4.7 out of 5 from 500 reviews.
Tablet Y: Average rating of 4.5 out of 5 from 300 reviews.
Laptop Z: Average rating of 4.2 out of 5 from 200 reviews.
10. Decision Making and Action Steps:
Based on the gathered data, TechGad makes decisions and action steps:
Promote Smartphone X further during the holiday season due to high demand and profit margin.
Maintain Tablet Y's current position as a reliable product but consider optimizing costs.
Reevaluate Laptop Z's position in the product lineup, possibly discontinuing it or revamping its features to increase demand.
We hope that you now have a better understanding of how to conduct SKU analysis to improve inventory management and the profitability of your business.