In this article, we will explore what SKU productivity is and the steps to it. We will also apply it to an example to better illustrate the process. Read on to learn more.
What is SKU Productivity?
SKU productivity measures how efficiently individual products generate sales, turnover, or profit for retailers and manufacturers. It's essential for inventory management, purchasing decisions, and product assortment optimization.
Example: if SKU A generates $500 in sales per month while occupying only 2% of the shelf space, and SKU B generates $300 in sales but occupies 5% of the shelf space, SKU A has higher productivity. Retailers might then prioritize SKU A for inventory restocking and promotional efforts based on its higher productivity metric.
Metrics to Measure SKU Productivity
There are many metrics to measure productivity but we have included some of the most common below.
1. Sales Volume: The number of units of a particular SKU sold over a given period.
2. Sales Value: The total revenue generated by a particular SKU over a certain period.
3. Gross Margin Return on Investment (GMROI): This metric gauges the profitability of an SKU, calculated as (Gross Margin / Average Inventory Cost). It measures the return on the investment in inventory.
4. Inventory Turnover: This indicates how many times an SKU's inventory is sold and replaced over a specific period. A higher turnover rate can be a sign of good SKU productivity, but it can also mean there's a risk of stockouts if not managed properly.
5. Shelf Space Allocation: This relates to the amount of shelf or display space a particular SKU gets versus its sales performance. More productive SKUs might warrant more shelf space.
6. Sell-Through Rate: The percentage of a product that's sold compared to the initial quantity. A high sell-through rate is generally favorable and indicates that an SKU is performing well.
SKU Productivity Formulas
SKU productivity doesn't have a single, universally accepted formula. Instead, it is assessed using a variety of metrics depending on the business's goals.
However, some commonly used formulas to gauge SKU-level performance include:
Sales Volume of SKU:
The Sales Volume of an SKU is determined by the number of units sold over a specific time period. It measures the quantity of a product that customers are purchasing.
Sales Value of SKU:
Sales Value of SKU is the total revenue generated by multiplying the unit price by the number of units sold for that specific product.
Inventory Turnover assesses how efficiently an SKU is sold by comparing the Cost of Goods Sold (COGS) to the Average Inventory Value. A higher turnover indicates that products are moving off the shelves quickly, optimizing inventory management.
Gross Margin Return on Investment (GMROI):
GMROI measures the profitability of an SKU by calculating the ratio of Gross Margin to Average Inventory Cost. A higher GMROI suggests that an SKU is generating more profit relative to its inventory investment.
The Sell-Through Rate quantifies the effectiveness of an SKU by evaluating the percentage of units sold compared to the initial inventory quantity. It indicates how well a product is resonating with customers and helps in timely restocking decisions.
10 Steps to Analyze SKU Productivity
Here's our framework to analyze SKU productivity:
Step 1: Data Compilation:
Collect relevant SKU data. This includes sales figures, inventory levels, and promotional activities for a specified period.
Step 2: Define Key Metrics:
Identify which metrics are most relevant to your business. Common metrics include Sales Volume, Inventory Turnover, and GMROI (Gross Margin Return on Investment, a measure of profitability).
Step 3: Establish a Baseline:
Determine average performance values for each SKU. This helps in identifying underperforming and overperforming products.
Step 4: Analyze Sales Trends:
Examine the sales trajectory of each SKU. Identify any patterns, such as seasonal fluctuations or the impact of promotions.
Step 5: Evaluate Inventory Efficiency:
Assess how effectively you're managing SKU inventory. High Inventory Turnover indicates quick sales, but too high might risk stockouts.
Step 6: Review Space Allocation:
Check if the shelf or storage space given to each SKU is proportional to its sales performance. Adjust as necessary for optimum visibility and accessibility.
Step 7: Calculate Financial Impact:
Determine the profitability of each SKU using GMROI or other profitability metrics. This helps prioritize which products deserve more attention or need reevaluation.
Step 8: Identify Opportunities & Risks:
Based on your analysis, pinpoint SKUs with growth potential and those at risk of underperforming. This will guide your purchasing and marketing decisions.
Step 9: Implement Changes:
Adjust purchasing, merchandising, and promotional strategies based on insights. This might mean discontinuing some SKUs, pushing others more aggressively, or altering pricing.
Step 10: Monitor & Adjust:
Regularly revisit SKU performance. The market changes, and so will SKU dynamics. Regular monitoring ensures you stay ahead of shifts in SKU productivity.
Let's explore the concept of SKU productivity through an analysis of EcoShoe, a sustainable footwear company known for its eco-friendly shoes. EcoShoe wants to enhance profitability and cater to customer demand by applying SKU productivity principles.
Step 1: Data Compilation
EcoShoe begins by gathering data from various sources, including its e-commerce platform and physical store sales records. They delve into the specifics of each shoe model (SKU), tracking metrics such as sales figures, available inventory, and the impact of recent promotional campaigns.
For instance, they discover that SKU #123, known as the "EcoHiker," had 800 units sold in the past month, an inventory of 500 units, and a recent 20% discount promotion.
Step 2: Define Key Metrics
To gain a comprehensive understanding of each shoe model's performance, EcoShoe establishes key metrics that matter most to them. In this case, they choose to focus on three crucial metrics: Sales Volume, Inventory Turnover, and Gross Margin Return on Investment (GMROI).
For example, SKU #456, the "GreenGlide" model, had a sales volume of 600 units, an inventory turnover rate of 4, and a GMROI of 2.5.
Step 3: Establish a Baseline
EcoShoe leverages historical data to set a baseline for SKU productivity. They determine that, on average, each shoe model typically sells around 500 units per month.
Step 4: Analyze Sales Trends
Upon diving into the data, EcoShoe identifies noteworthy sales trends. For instance, the "EcoTrek" hiking boots experience a surge in sales during the fall season, which coincides with an uptick in outdoor activities.
Step 5: Evaluate Inventory Efficiency
EcoShoe assesses the efficiency of its inventory management. Take SKU #789, the "EcoDress" shoes, as an example. These shoes exhibit a high Inventory Turnover during the holiday season but tend to stagnate during the summer months, suggesting a potential overstocking issue.
Step 6: Review Space Allocation
In their brick-and-mortar stores, EcoShoe scrutinizes the placement of their products. They notice that the "EcoGrip" trail shoes, which are top-sellers, are tucked away in a less visible section. They consider relocating them to a more prominent position within the store.
Step 7: Calculate Financial Impact
EcoShoe conducts a financial analysis and uncovers valuable insights. For instance, SKU #567, the "EcoComfort" slip-ons, may not have the highest sales volume, but their significant margin results in a favorable GMROI, contributing significantly to the company's bottom line.
Step 8: Identify Opportunities & Risks
EcoShoe identifies opportunities and risks within their product lineup. They recognize the potential to expand the size range of SKU #101, the "EcoSport" running shoes, as there is growing demand for extended sizes. Conversely, the "EcoClassic" retro sneakers are experiencing declining sales, signaling a need for potential redesign or rebranding.
Step 9: Implement Changes
With data-driven insights, EcoShoe takes action as they launch a targeted promotional campaign for SKU #456, the "GreenGlide," in the fall to capitalize on the hiking season. Simultaneously, they reduce inventory levels of SKU #321, the "EcoSplash" sandals, during the winter months to prevent overstocking.
Step 10: Monitor & Adjust
EcoShoe regularly monitors the impact of their changes. After three months, they find that the promotional campaign for SKU #456 has boosted sales significantly. However, they continue to face challenges with SKU #654, indicating the need for ongoing adjustments and innovation to optimize SKU productivity.
We hope that you now have a better understanding of the steps in implementing SKU productivity analysis to improve your business operations.