SKU Optimization: The Ultimate Fix for Grocery & Food Retail Shortages

January 18, 2024 · 8 minutes
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Consumer stockpiling. Labor strikes. Port congestion. Changing demand due to inflation. And the resultant empty shelves. What started off as toilet paper shortage in 2020 continues to show up in grocery and food retail even three years later.

As per an IHL Group study, food retail and groceries are missing almost $1 trillion in sales due to these stockouts. And that makes sense – customers don’t really care why there is a product shortage. When they can’t find what they need at your store, they’ll simply turn to another retailer or grocery store.

On the flipside of the same situation, retailers who face stockouts react by either trying to replenish faster, adding to extra expedited shipment cost or they overorder and end up having to deal with excessive holding cost in warehouses, and sometimes even with massive deadstock on hand!

But stockouts aren’t a new story in the grocery and food retail industry. Of course, the pandemic worsened the situation but as per a survey, the European Grocery Industry, for instance, loses 400 billion Euros yearly because of stockouts. 

So what can you do to ensure you don’t run into product shortages and disappointed customers again and again?

The answer lies in SKU Optimization. With large product portfolios, SKU optimization can seem resource intensive and challenging but in this article, we want to reiterate why SKU optimization is still your go-to solution for the ongoing grocery supply chain problems and how a good SKU optimization software can help you navigate the challenges that come with large portfolios.

But first things first, let’s understand the causes of this supply chain shortage.

Causes of Product Shortage in Grocery and Retail Stores  

A Harvard Business School research discovered that only 7 to 21% of customers facing a stockout will continue to buy without choosing a substitute product; about 21 to 43% of customers would switch to another store to buy their preferred item.

Often, insufficient planning and human error are blamed to be the cause for stockouts and various inventory management challenges. However, even well-prepared companies can encounter unforeseen circumstances, such as supplier delays or manufacturing disruptions, resulting in product unavailability. Amongst all the challenges, here are the most common causes of stockouts:

  • Flawed Estimations

Unreliable forecasts significantly increase the risk of stockouts or overstock situations. There is no challenging the fact that accurate demand forecasting is vital in preventing or mitigating stockouts. Unfortunately, most traditional demand forecasting tools are falling short in the face of sudden and unpredictable shifts in customer trends.

  • Improper Records

Incorrect inventory counts represent another major factor contributing to stockouts. Human error, such as miscounting or mistakenly entering wrong numbers during manual inventory management, is often to blame for these inaccuracies.

Technical issues can also impact inventory counts, mainly when a company operates multiple sales channels that lack real-time updates for inventory levels. 

  • Delay From Suppliers

Supplier delays have been one of the most common challenges in the pandemic and post-pandemic world given all the disasters and geopolitical unrest that have been taking place. Delays can occur at several points in the supply chain, like in the supply of raw materials or intermediate parts. 

  • Production Holdups

Yet another problem that has been widespread in its impact is labor shortage. Delays in production because of a labor shortage and even machinery malfunction can eventually lead to stockouts or deficiencies.

  • Logistics Problem

Environmental phenomena, such as natural disasters, have the potential to disrupt the supply of raw materials or cause damage to production facilities.

Vehicle breakdowns or road accidents can also impede the timely delivery of essential materials or goods. Mechanical issues can lead to delays in production schedules. 

  • Product Quality Issue

A lot of times, product quality problems lead to a big number of returns to the producers, thereby causing stockout.

  • Shortage of Working Capital

Every CSCO would agree to this one. Limited working capital limits the number of orders placed every month. This may be caused by inefficient cash flow management and other inventory problems like too much cash held up in unwanted inventory.

  • Underordering

Underordering can be a result of bad decision-making, an inefficient ordering system or poor forecasting. An efficiently run inventory management system assesses the recommended order quantity with basic inputs like lead time, safety stock, forecast etc, in the absence of which a retailer runs the risk of understocking the hot-selling products and overstocking the slow moving ones.

How to Manage Stockouts with SKU Optimization Regardless of the Cause

In simple terms, SKU optimization involves assessing your existing product portfolio and removing all underperforming or unwanted SKUs from your catalog while freeing capacity for the production, storage and distribution of your high-performing SKUs.

While doing this manually can be hectic and challenging for large portfolios, adopting a good AI-powered SKU Optimization software can help you navigate this roadblock.

It goes without saying that every retailer can benefit significantly by thoroughly evaluating their product and store performance. Implementing SKU reduction creates easier-to-manage assortments, making it more efficient, and ultimately, more profitable.

This approach results in fewer stockouts of the products retained in the assortment, emphasizing depth over breadth. It enables a sharper focus on product performance and provides greater flexibility in supplier-level considerations.

Moreover, this strategy enhances the overall shopping experience for customers by reducing distractions caused by fringe products and unnecessary breadth, increasing the likelihood of customers finding their preferred products.

By streamlining assortments, retailers can optimize their operations and deliver customers a more satisfying shopping experience too.

Retail SKU rationalization allows grocers to make better business decisions and as a result, have seen registering profit and boost in sales of up to two to four percent.

A leading European Retail Giant, for instance,  with more than 15000+ SKUs and facing problems like a lack of good data-driven demand visibility and high operational, material, and logistics expenses, adopted SKU optimization to prioritize their high-value, high-performing SKUs bringing about a ripple effect of positive impact across the entire supply value chain and boosting their profit margins by 30 million euros in less than three months.

SKU Optimization Best Practices

The movement towards SKU optimization is nothing new, but the recent supply chain disruptions have resurfaced conversations around the topic. 

With 80% of people surveyed agreeing that customers will rank stock availability over loyalty in the coming time, how effectively are food retailers and groceries using the SKU rationalization approach that is so easily accessible to them is the question.

SKU rationalization may not sound exemplary, but it will help boost merchandising, lower stockouts, reduce excess inventory, and enhance the bottom line of grocers and retailers. Period.

If you’re considering brushing up your SKU optimization practices, here are the best practices to consider:

  • Stay on Top of Demand

When implementing SKU rationalization strategies, you must prioritize understanding demand in the long-term and the near and short-term. If your demand forecasting is throwing up error-prone forecasts frequently, it is important to address the issue first. 

A dynamic approach to demand forecasting that’ll help manage your supply chain with real-time insights is your best bet.

  • Integrate SKU With Banner Strategy

If you’re worried that optimizing your product mix by eliminating low-performing SKUs will impact your customer satisfaction, then here’s an important piece of information: Your assortment should align with your store banner strategy.

Different retail banners cater to distinct customer segments, influencing the required SKU variety. Retailers targeting big, brand-loyal family shoppers may need a broader range of SKUs to meet this customer base’s diverse preferences and needs.

On the other hand, retailers targeting minimal-income families may have a more focused assortment with specific products that cater to their unique requirements.

Adapting the SKU variety in accordance with the store banner strategy ensures that retailers effectively meet the demands and expectations of their specific customer segments. With this perspective in mind, don’t fear eliminating SKUs that aren’t performing well enough.

  • Test Before Execution

The process of SKU rationalization can have a significant impact on a retailer’s business, with outcomes that can be either positive or negative, depending on the accuracy of planning and execution. Instead of implementing SKU rationalization decisions across the entire store network all at once, you can opt for a more cautious approach.

You can initially test and implement planned choices in a small group of designated stores. This allows you to assess the actual impact of the changes and validate the estimated outcomes before expanding the implementation to a broader scale.

The Competitive Advantage in SKU Rationalization

Manual SKU optimization is not really possible for food retailers and groceries with a large number of SKUs. If you’re one of them, you should prioritize finding tools that enable you to assess the profitability and performance of each item on auto-pilot and with limited manual intervention.

A reliable tool that continuously and automatically monitors product success across multiple channels empowers retailers to make informed decisions regarding the assortment’s breadth and depth at each location.

By leveraging such tools, you can not only optimize your time but you can also swiftly enhance your profit margins. Monitoring and receiving recommendations on assortment adjustments in real-time allows retailers to maximize their efficiency and make data-driven decisions that drive profitability.

Before we sign off, and if you’re considering SKU optimization as a potential solution to stockouts, here’s a quick introduction to ThroughPut. We are an AI-powered platform that makes SKU rationalization possible at scale and in real-time.

With SKU rationalization, you can match the products in the store shelves to real-time customer demand and work upstream to align inventory, production and raw material management, saving you time, money and resources. 

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Anita Raj - Vice President of Product Marketing at ThroughPut AI
Anita Raj
Vice President of Product Marketing