Smart SKU Management: Improve Forecasting and Reduce Stock

Managing a broad product catalog might seem like a smart way to increase sales by offering more variety. But without clear guidelines around profitability and turnover, poor SKU management often produces the opposite effect: excess inventory, forecasting errors, and unnecessary complexity that drags down overall supply chain performance.

In this article, we explore the risks of SKU proliferation, effective segmentation methods, and the tools that help you make data-driven decisions, backed by real numbers and examples from the field.

What Is an SKU and Why Is It So Critical for Logistics and Planning?

SKU stands for Stock Keeping Unit, the smallest inventory unit a company tracks. It’s a unique code that reflects key attributes like product type, size, flavor, format, or packaging. Managing operations by SKU enables precise calculations for quantities, timing, and cost across all supply chain activities. In fact, the SKU is the operational “currency” that keeps departments aligned, because when even one SKU is understocked or overstocked, the entire value chain can suffer.

Beyond inventory, the SKU is also the core unit for setting safety stock, managing the product mix, and measuring line-level profitability. When SKU count increases without evaluating turnover or margin, visibility drops and decisions become reactive. Smart SKU management is the foundation for reliable demand planning and streamlined execution in production and logistics.

Why SKU Proliferation Hurts Efficiency

The rise of e-commerce and product customization has led many companies to expand their catalogs to capture niche segments. This trend, SKU proliferation, increases the volume of master data, planning parameters, and picking operations. It creates more friction points and locks up more working capital.

As the number of SKUs grows, forecasting becomes less accurate because historical demand gets diluted. Each new SKU adds changeovers in production, wider distribution routes, and more warehouse locations, all of which increase handling and logistics costs. In short, uncontrolled SKU growth reduces efficiency from planning all the way to delivery.

How an Oversized Catalog Affects Forecasting, Inventory, and Production

When a catalog grows without a clear strategy, complexity builds across the supply chain. Each additional SKU requires its own forecast, stock settings, and often custom setup in both production and warehousing. The result? More data to manage, more failure points, and production capacity split into tiny batches. That means less accurate plans, inflated inventory, and underutilized resources.

Let’s look at two key impacts in more detail:

Why Forecast Accuracy Declines as SKUs Increase

Forecasting models rely on historical data to spot trends. When an item only sells a few dozen units per month, random variation overwhelms any signal, and MAPE (Mean Absolute Percentage Error) can easily exceed 40%. Aggregating at higher levels (SKU → family → category) also loses effectiveness when terminal branches lack consistent data, making top-level forecasts less reliable.

The Hidden Costs of Setup and Capacity Strain

Each new SKU often brings new formats, recipes, or packaging. In sectors with expensive setups (like food, cosmetics, or chemicals), line changeovers go up, usable capacity goes down, and queues grow. Production shifts from efficient batching to micro-runs, raising energy use, scrap, and cleaning time.

In warehouses, more SKUs mean more storage zones, longer pick paths, and more chances for errors. In transportation, underfilled trucks and irregular routes increase cost per shipment.

Proven Methods for Segmenting SKUs

There’s no universal rule for managing large product catalogs. The key is combining segmentation techniques based on volume, variability, and network structure.

At the tactical level, many companies use ABC-XYZ matrices to set service levels and multi-echelon inventory optimization (MEIO) to manage safety stock across the network. Knowing which approach to apply (and when) is what separates lean inventory from operational overload.

When to Use ABC-XYZ vs. MEIO

ABC-XYZ is best when your focus is on differentiating service levels or order cycles without heavy analytics. It’s ideal for operations with a few nodes, short lead times, and minimal interdependencies. For example, you might review stock daily for an A-X item, and only produce a C-Z item on demand, cutting waste and freeing up line time.

MEIO, in contrast, shines when you manage a network with shared inventory risk across multiple locations. If one site is out of stock while others hold surplus, MEIO calculates the optimal safety stock distribution, factoring in lead times, demand correlation, and inter-node dynamics. It’s especially useful for global supply chains, long lead times, or hybrid channels like brick-and-mortar and e-commerce.

Example: Should You Keep or Cut an SKU?

Say you’re reviewing a C-Z SKU that sells 500 units per year with a gross margin of $8 and holds 250 units in average inventory. That’s a 2x turnover and a $4,000 gross margin. But if annual holding costs for that inventory total $4,500, you’re losing money.

This analysis points to one of two decisions: either delist the SKU or shift it to a make-to-order model, freeing up space and cash for high-margin A-X items.

What Happens When You Cut Low-Value SKUs?

Eliminating low-performing SKUs unlocks warehouse and factory space, reduces working capital, and simplifies operations. In fact, reducing your catalog by just 10% can cut total inventory by up to 18% and improve OTIF (On-Time In-Full) by around 3 percentage points, because more inventory is focused on items customers actually want.

With fewer SKUs, production runs get longer, improving OEE (Overall Equipment Effectiveness) and reducing downtime, scrap, and energy use. Warehouses can eliminate slow-mover zones, shorten picking routes, and reduce spoilage or obsolescence risk. The bottom line? More liquidity, more agility, and more room to launch high-potential SKUs.

Tools and Dashboards for Smarter SKU Management

While a simple SKU audit might start in Excel, dynamic segmentation and continuous policy updates require more advanced tools. The best option is a supply chain planning platform with built-in analytics.

These systems link sales, inventory, and capacity into one data model. They display real-time Pareto curves for volume, margin, and turnover; automatically recalculate ABC-XYZ classifications with customizable thresholds; and simulate the effects of delisting SKUs on inventory and service levels.

A connected BI dashboard is also essential for visualizing key KPIs, with filters by product family, region, or channel. Combined with RPA (Robotic Process Automation), the system can generate alerts, for example, if an SKU moves from B-Y to C-Z, triggering a review for possible delisting or make-to-order conversion. Together, SCM software, BI tools, and automation shift catalog decisions from gut feeling to data-driven action.

How Better SKU Management Strengthens Your Supply Chain

Streamlining your catalog and segmenting SKUs by value and turnover is one of the fastest ways to free up cash and improve efficiency. When you eliminate low-contribution items, inventory aligns with real demand, production stabilizes, and warehousing becomes leaner.

At the same time, forecast accuracy improves because models focus on reliable data. And when powered by planning software that connects demand, stock, and capacity, you gain tools to automate classification and run instant what-if scenarios.

In short, smart SKU management turns excess stock into working capital, frees up capacity for innovation, and aligns your supply chain strategy with your operational reality.

At Imperia, we offer a full supply chain optimization platform to help you get there. Ready to streamline your catalog?

Request a free consultation, we’ll help you unlock efficiency where it matters most.