SKU Proliferation | 4 mins read

SKU Proliferation - Definition, Causes, and More

sku proliferation definition causes and more
Hanh Truong

By Hanh Truong

Companies have been adding products to their inventory to meet new expectations, as consumer demands continue to change due to evolving trends and seasonality.

While it makes sense to do so to attract customers and boost sales, this process, known as SKU proliferation, can negatively impact a business's bottom line if it is not done carefully.

What is SKU Proliferation?

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SKU, or stock-keeping unit, proliferation refers to the practice of increasing the number of products in inventory. Businesses will often do this when they learn more about their consumer base's preferences and tries to tailor their goods to meet demand.

For example, a coffee shop may begin its operation by selling tumblers in 5 colors. Eventually, the business owner may learn that their guests prefer a competing shop's tumblers because of its vibrant colors.

To generate more sales, the owner adds 10 more colors to their tumbler collection, effectively increasing their SKUs from 5 to 15.

This can become a never-ending cycle, as more products and variants are added to inventory to satisfy customers' expectations.

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Consequences of SKU Proliferation

SKU proliferation enables businesses to have the right inventory products and to gain a competitive edge over other companies. However, there are negative consequences that can occur if careful consideration and analysis are not performed.

Increased Storage Costs

As more inventory products are added to the business's catalog, the warehouse facility will have an influx of new goods. This can increase storage-related expenses, such as holding costs, and can impact a small business's profitability.

Inaccurate Order Fulfillment

More inventory products also mean large amounts of SKUs will be generated. Oftentimes, these SKU numbers will become similar or complex and can result in more room for error, such as choosing the wrong product for an order.

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Increased Order Cycle Time

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Businesses want to aim for a short order cycle time to ensure that orders are fulfilled and shipped out quickly. However, since there are large volumes of SKUs in the warehouse, employees may have to take more time to find the right products for their orders.

Inefficient Allocation of Resources

When most of a company's capital is allocated towards new products and warehouse-related expenses, there will be fewer resources left over for other investments that are crucial to a business's growth.

For example, a company may need new software, advanced machinery, more employees, and marketing campaigns to thrive and be productive. But with a lack of funding, they will be unable to do so.

Key Causes of SKU Proliferation

Typically, brands will have to conduct SKU proliferation due to various natural causes. Some of the most common reasons why inventory is added are -

Technological Advancements

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New technology is constantly being created and added into the market; therefore, businesses may need to stay on top of trends to ensure they can cater to consumers' needs. For example, when Apple's AirPods were released, many retailers added a variety of AirPod cases to their store.

Demands for Quick Delivery

Shoppers prefer having their orders shipped and delivered promptly, as soon as they place a purchase. To accommodate demands for quick delivery, businesses have been procuring and holding more stock on-hand, even for unpopular items, to ensure that they can quickly send out an order.

Changing Customer Expectations

New seasons, global events, or trends can easily and quickly shift customer needs. Brands are inclined to keep pace with changing customer expectations and to consistently stock their warehouse with exactly what their shoppers are looking for.

Poor Inventory Management

Without proper inventory management, business owners will not have a full understanding of which products are profitable, their consumer demands, and how well their sales are doing. In turn, this makes it difficult for them to strategize efficient inventory replenishment plans.

Additionally, ineffective stock control can lead to excess obsolete products in the warehouse. Since management teams lack insight into customer needs, they may end up holding onto slow-performing items and unnecessarily increase their SKUs.

SKU Rationalization and Proliferation

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SKU rationalization is the method of reducing the number of SKUs due to unsuccessful product performance, obsolescence, or duplication.

This practice helps businesses optimize their inventory by making informed decisions on which products they need to keep in their store and order more of. It also directs management teams to use historical sales data to effectively determine slow-moving products that they must reduce or eliminate from inventory.

With SKU rationalization, companies will not have to experience the negative consequences of SKU proliferation.

Organizations can enhance their management of SKUs by implementing digital tools, such as inventory control software. These solutions allow for online inventory tracking and provide data reports about sales, profitability, and popular stock items.

This can effectively drive executives to have a comprehensive understanding of their inventory and to be cost-efficient when making purchasing decisions.

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