4 Steps to Unlock the Value of SKU Rationalization in the Packaging Industry

When it comes to the packaging category, there is a crucial aspect that often goes unnoticed but holds immense significance. It’s SKU rationalization.

This practice, which involves streamlining and optimizing the number of stock keeping units (SKUs) within a company's packaging portfolio, can have a major impact on procurement processes and overall business success.

In this blog post, we will delve into the importance and impact of SKU rationalization from a procurement point of view, uncovering the value it can unlock for businesses in the packaging industry.

SKU rationalization is a strategic process that involves analyzing and optimizing the product catalog of a business.

In the packaging industry, this process is of paramount importance due to the vast variety of products and materials involved.

The Value of SKU Rationalization

SKU rationalization brings several benefits to the table. It helps businesses reduce costs, streamline inventory processes, and improve profit margins.

By understanding and optimizing their current stock levels, businesses can make informed decisions about which SKUs to keep, discontinue, or introduce.

Impact of the Pandemic on Packaging SKUs

During the COVID-19 pandemic, changes in consumer behavior and disruptions in supply chains led to fluctuations in demand for certain types of packaging. Due to these disruptions, there were instances of stockouts for primary items, leading to a surge in orders for substitute items. These instances presented unique challenges for the packaging industry, making SKU rationalization an important strategy.

This also led to many new learnings.

By rationalizing SKUs, companies can now better manage their inventory, respond to changes in demand, and mitigate the impact of supply chain disruptions.

How to Do SKU Rationalization

Performing SKU rationalization involves several steps.

First, businesses need to identify the stakeholders and end users and understand their needs.

To perform SKU rationalization effectively, these key steps are crucial:

1. Specification analysis:

Gather and analyze comprehensive data on SKU specifications, spend patterns, end user requirements, raw material trends and sustainability dynamics. Also, utilize analytics tools to gain insights and identify tail spend SKUs.

2. Collaboration and communication:

Engage cross-functional teams, including procurement, packaging, sustainability teams, to gain a holistic understanding of the SKU landscape. Collaboratively identify redundant SKUs and alternatives that can be consolidated.

3. Prioritization:

Prioritize SKUs based on higher volumes, market demand, end user preferences, and strategic importance. Consider factors such as product differentiation, lead times, and supplier capabilities.

4. Implementation and monitoring:

Develop an implementation plan and timeline for SKU rationalization. Monitor the impact on inventory levels, supplier relationships , and overall cost savings. Regularly review SKU performance and adjust, as necessary.

Once the analysis is complete, businesses can organize their product catalog and track the spend data. Data analytics tools can be extremely helpful in this process, providing insights into spend trends, customer preferences, and market dynamics.

Results of SKU Rationalization: Savings through Consolidation

1. Cost savings:

With fewer SKUs to manage, companies can achieve quick cost savings of 3-5% through reduced inventory holding costs, lower transportation expenses, and lower warehousing costs at suppliers and distributors.

2. Volume Consolidation:

SKU rationalization lead to volume consolidation, which can be used to negotiate better rates directly with incumbent suppliers. By eliminating unnecessary duplication and standardizing packaging options, procurement teams can drive operational efficiency and reduce overall procurement spend.

3. Supplier Base Consolidation:

SKU rationalization enables procurement teams to consolidate their supplier base, forging stronger partnerships with key suppliers. By working closely with a smaller number of trusted suppliers, businesses can negotiate better terms, ensure consistent quality, and benefit from improved service levels, enhanced operational efficiency, thus leading to better overall supply chain performance.

A Powerful Strategy

SKU rationalization can unlock significant value for businesses in the packaging industry. By reducing complexity, driving cost savings, and improving efficiency, companies can position themselves for success in an increasingly competitive marketplace. So, whether you are a packaging manufacturer, distributor, or retailer, considering SKU rationalization should be on top of your agenda.

Author: Ninad Mirajgaonkar