SKU rationalization is the systematic process of evaluating every product in your catalog to determine which SKUs to keep, consolidate, or discontinue — using contribution data rather than intuition to reduce procurement complexity and redirect capital toward items that actually earn their shelf space.
Quick answers
What is SKU rationalization? SKU rationalization asks a simple question of every item in your catalog: does this SKU generate enough margin to justify the procurement, storage, and management cost of keeping it active? SKUs that don't are candidates for consolidation (merging similar variants) or discontinuation (dropping entirely). The goal is a smaller, higher-performing catalog.
Why does SKU count matter for procurement? Every active SKU carries a procurement cost: ordering frequency, receiving labor, storage space, carrying cost, cycle count time, and system maintenance. These costs exist whether the SKU sells 500 units per month or 2. More SKUs means more complexity — more supplier relationships, more purchase orders, more chances for error — with diminishing returns on the margin side.
How does rationalization connect to ABC analysis? ABC analysis provides the data input. C-items — the ~50% of SKUs contributing ~5% of inventory value — are the primary rationalization targets. Not every C-item should be dropped (some are strategically necessary), but every C-item should be justified.
When should you rationalize? At minimum, annually. Better triggers: when catalog size exceeds the team's capacity to manage it, when inventory turnover is declining despite stable revenue, or when warehouse/storage space constrains growth.
The formula
SKU contribution margin (net of procurement overhead):