Cutting SKUs sounds simple. But what if your approach to it actually hurts your business more than it helps?
SKU rationalization: the term alone sends shivers down the spine of many marketing managers and sales teams. Typically introduced as a ‘crisis-driven exercise’ every few years, it’s rarely effective and often causes more harm than good. The underlying issue isn’t just execution. It’s conceptual. Even by calling it “SKU rationalization”, businesses mistakenly frame the effort as purely about eliminating certain products. However, successful portfolio management goes far beyond simply cutting SKUs: it’s about strategic, continuous optimization.
What is SKU Rationalization?
SKU stands for Stock Keeping Unit, a unique identifier for each distinct product variant. SKU rationalization refers to the process of evaluating and reducing the number of SKUs a company manages, typically to streamline operations, cut costs, and improve profitability. While it sounds beneficial in theory, traditional SKU rationalization often focuses too narrowly on removing products rather than optimizing the overall product portfolio.
In our team’s experience, the fundamental flaw starts the moment companies label their initiative as SKU rationalization. The real objective shouldn’t be sporadic cuts. It should be establishing continuous portfolio optimization, driven by clear governance, objective rules, and strategic insights into products that genuinely move the needle and induce EBITDA growth.
Here are the five pitfalls that companies commonly overlook, and how you can avoid them:
Every three to five years, margins drop, panic sets in, and the rationalization project begins. It’s often a subjective discussion, launched as a major initiative to restore business margin, rather than part of a structured, data-driven performance process. These projects are ineffective precisely because they’re intermittent and reactionary, initiated only after margins have already eroded.
The result? Too little, too late.
Even after an extensive one-time clean-up, companies soon find their portfolios swelling again, leading to a vicious cycle of inefficiency and frustration. Results aren’t sustained, and the same challenges resurface a few years later.
The solution is to shift towards a continuous and proactive portfolio optimization process, or corporate performance process, for instance a margin improvement process. Practically, this means quarterly portfolio reviews embedded into daily operations, clear rules for evaluating performance, and designated accountability to ensure consistent action and measurable improvements.
Pitfall #2: subjective decision-making
Without clear rules or criteria, decisions around which SKUs to eliminate become emotional and politically charged. Sales and marketing teams become defensive about their products, while finance aggressively pushes for cuts. Subjectivity leads to internal friction and inconsistent results.
To overcome this, businesses must implement transparent and predefined portfolio guidelines:
Objective portfolio guidelines, grounded in clear data, take emotion out of the equation and provide a consistent, company-wide basis for decision-making.
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Most SKU rationalization projects rely too heavily on commercial data like revenue and margin. That’s not enough.
Inventory performance is often overlooked, even though it directly affects working capital and net margin. Including metrics such as Net Margin Return on Inventory (NMROI) helps assess how efficiently a SKU generates profit relative to the inventory it ties up.
Operational data is also missing in most cases. Without it, companies can’t identify where portfolio changes could reduce non-productive time in plants or support improvements in OEE.
And when the Bill of Materials isn’t considered, teams miss opportunities to simplify components, improve commonality, or evaluate how cutting SKUs impacts upstream material flows.
A complete view combines commercial, inventory, operational and structural data. Anything less leads to short-sighted decisions.
Many companies equate SKU rationalization solely with cutting the long tail and eliminating SKUs. While removing underperforming SKUs is essential, focusing only on phase-out can severely limit strategic growth. Often overlooked are “needle movers” or products with high sales volumes and significant potential for improvement.
Instead of only chasing minimal savings on insignificant SKUs, companies should also put focus on optimizing their high volume products. Investing attention in these impactful products can substantially boost revenues and strengthen competitive advantage, demonstrating that true optimization balances cost control with smart investment.
Companies often decide on a long list of portfolio actions, but only a fraction ever gets implemented. It’s not uncommon to see 100 decisions made and just 20 executed. Without follow-through, even the best rationalization efforts deliver little real impact.
Implementation takes time and coordination. Portfolio decisions typically require multiple steps carried out by stakeholders across finance, operations, supply chain, and commercial teams. If that execution doesn’t happen, the expected margin, efficiency, or working capital improvements never materialize.
A good monthly follow-up process is what sets successful organisations apart. It ensures that chosen actions are tracked, ownership is clear, and progress stays on course.
Continuous evaluation remains important—product performance evolves, and so should your portfolio. But it’s consistent implementation that turns decisions into measurable results.
Ultimately, companies must move beyond sporadic SKU rationalization to a continuous, strategic portfolio optimization approach. This isn’t simply semantics. It’s a mindset shift.
How to achieve this?
Technology is essential for supporting this transformation. Solventure Perform specifically addresses this challenge by providing real-time visibility into your portfolio’s financial health, direct integration with existing ERP systems, and robust governance capabilities. The platform enables your business to objectively track financial impacts, reducing complexity and emotion-driven decision-making. This structured approach ensures your portfolio insights lead to measurable, meaningful outcomes instead of reactive, short-term actions.
This continuous optimization approach not only streamlines your product portfolio but is directly linked to financial results, such as EBITDA growth. By continuously managing and refining your portfolio based on clear financial targets and strategic alignment, businesses can significantly improve their bottom line, boosting EBITDA by 3% or more.
In summary, the future of your product portfolio isn’t another reactive, short-term SKU rationalization project. It’s an ongoing optimization strategy, embedded in your company’s culture and processes.
Less drama, more EBITDA.
