How SKU Rationalization Boosted Profit Margins by €30 Million for a European Retailer

Impact Summary 

A popular European Retailer with 65 years of industry presence used ThroughPut AI to drive its retail SKU rationalization strategies effectively. Consequently, the company:

• Improved margins by up to €30 million by adapting operations to changes in demand
• Identified 200 items with sporadic demand and poor OTIF fulfillment rates
• Reduced operating expenses by €2 million through better allocation of top 150 SKUs 
• Identified opportunity to drive a bottom-line impact of up to €10 million per facility

About the Retailer 

A leading European retail chain that has been operating for approximately 65 years. It is one of the first retailers in the region to pioneer the transition to organic products and online shopping. The innovative company, which employs more than 20,000 people across hundreds of stores and warehouses, offers a variety spanning more than 15,000 products across several categories, and has been catering to online orders for over 18 years.

Challenges of Retail SKU Rationalization

The modern retail value chain faces more disruptions than ever before, in addition to changes in customer needs and preferences, and changing local trends. However, in an industry plagued by low margins (typically 1–3%), to be able to establish a clear competitive advantage, it is critical to tide through these market shifts and identify distinct priorities aimed at maximizing customer value as well as sales. In this regard, the retailer faced the following challenges:

Inability to Acquire a Data-driven View of Demand

An end-to-end view of retail demand is essential to accelerate operational efficiency, save costs, and improve customer experience. A data-driven approach to understanding demand is also key to recovering post disruptions of the size and scale of the COVID-19 pandemic. This helps businesses prioritize and allocate resources for goods that are worth the investment. For instance, demand data should be able to help businesses answer these questions:

• How many SKUs rake in a positive margin? 
• How does profit margin respond to variations in product value and demand?

Elimination of Low-value SKUs, Optimization of Allocation and Replenishment of SKUs

The client also needed visibility to identify low-value, low-demand SKUs, which could then be eliminated/reduced to make way for higher-value, higher-demand products that could have a large impact on the bottom line and sales margins. Once these were identified, packaging, space allocation, and stock replenishment could be planned to ensure continuous availability of never-out-of-stock products, while also freeing up capacity to test new products. This exercise also helps minimize transportation costs, resulting in a significant impact on the bottom line.

Reduction of Material and Operational Costs

Once the underperforming SKUs are identified and eliminated, material and operational investments are reduced, while also freeing up capacity for larger-value orders. Thus, these SKUs can have sufficient inventory buffers so that there is no possibility of unanticipated stock outs during periods of high demand.

Decreased Logistics Costs

With just the right SKUs to focus on, businesses can focus more on meeting customers’ quality expectations, and more importantly, ensuring on time, in full (OTIF) deliveries. Prioritized SKUs also mean better planning, leading to fewer unplanned deliveries with expensive, expedited shipping costs. As a result, logistics costs decrease significantly.

The client wanted to adopt an intelligent, cognitive approach to its operations, in the process shifting from a traditionally blind, instinctive approach to one that involves continuous analysis of customer demand.

How the Retailer Boosted Margins with SKU Rationalization?

With ThroughPut’s AI-powered software suite, the retailer was able to automatically segment hundreds of thousands of SKUs by demand and value, thus allowing it to optimize its product mix for maximum profit margin. ThroughPut analyzed the client’s time-stamped point of sale data, and enabled real-time product mix optimization based on variations in customer demand.

After years of using siloed data systems and manual excel sheet calculations, the retail group was, for the first time, not only able to sense and analyze demand in real time, but also predict it accurately for the near term to enable effective demand planning. ThroughPut’s  powerful AI and ML capabilities enabled the client to optimize its product mix for maximum profitability, sales, and inventory turnover while also cutting down on transportation costs and enhancing free cash flow.

Demand Sensing and Product Mix Optimization

With custom AI deployed on historical sales data, the client was able to monitor and analyze shifting demand patterns at a SKU level in real time, allowing for accurate estimation of demand. The client could also identify which products raked in a high profit margin and which ones did not, while simultaneously affecting more efficient stock replenishment and distribution targets aimed at driving maximum value to the business as well as its customers.

The SKUs that were of low value and also witnessed low demand were immediately eliminated, clearing the path for more effective utilization of resources. Other SKUs were also drawn up into a demand-value matrix, based on which they were prioritized to ensure maximum margins.

Reduction of Transportation Costs

Once the SKUs were optimized for demand, logistics became easier to plan, with little to no need for unplanned, accelerated deliveries – and related charges. Allocating, packaging, and distribution of SKUs, too, became much more streamlined than before, allowing for smoother operations across the value chain.

Impact of Retail SKU Rationalization

ThroughPuts AI enabled the retailer to maximize sales, profits, and turnover, while avoiding dead stock as well as stockouts.

• Identified 200 items with sporadic demand and poor OTIF fulfillment rates
• Reduced operating expenses by €2 million through better allocation of top 150 SKUs
• Identified opportunity to drive a bottom-line impact of up to €10 million per facility

Benefits of ThroughPut AI

This case study on how SKU rationalization boosted profits for the European retailer pinpoints four major value-driven advantages. These are: 

ROI in 90 Days

ThroughPut AI enabled the European retailer to achieve significant profits within 90 days by optimizing its SKU portfolio. By leveraging AI-driven insights, the retailer quickly identified low-performing SKUs that were draining resources. This rapid SKU rationalization allowed the company to streamline its inventory, reduce operational costs, and focus on high-demand products, leading to a swift boost in profitability. 

That’s a big advantage in the extremely competitive market today. With ThroughPut AI, there are no long implementation delays—just immediate, measurable impacts. The tool’s ability to enhance decision-making ensures accelerated ROI, positioning the retailer for sustained success.

Works with Existing Data

ThroughPut AI integrated seamlessly with the retailer’s existing systems, utilizing historical sales data to generate actionable insights. There was no need to introduce new data sources or overhaul their current infrastructure. 

This approach allows retailers to unlock hidden opportunities within their existing product mix, quickly identifying which SKUs to keep and which to phase out. By using familiar and historical data, retailers avoid complex transitions and costly system overhauls, driving efficiency gains from day one.

Customizable to Retail Needs

ThroughPut AI’s adaptability to the retail sector proved vital for the client. The AI tool was customized to address the unique challenges faced by the European retailer, focusing on optimizing product assortments, improving stock turnover, and reducing excess inventory. This tailored approach meant the insights generated were highly relevant to the retailer’s specific operations, delivering recommendations that enhanced product selection and shelf management. 

The flexibility of ThroughPut AI is a big source of value for  retailers who are looking to maximize profits by focusing on what matters the most to their business.

Patented Algorithms for Advanced Analytics

At the core of ThroughPut AI are its patented algorithms, designed to analyze vast amounts of data with speed and precision. For the European retailer, these algorithms went beyond basic analytics, offering deep insights into SKU performance, customer demand trends, and inventory optimization. 

By leveraging these advanced analytics, retailers can make more informed, data-driven decisions, ensuring their product mix is aligned with market demand. The innovative approach provided by ThroughPut AI’s algorithms helps the retail industry stay ahead of competitors and maintain their operational efficiency.