In a previous post we talked about the importance of warehouse management systems (WMS) or inventory management software. What role do SKU codes play within this system? What is their usefulness and how can we get the most out of it?
Determination of profitability by product with SKUs
By calculating SKU ratios and comparing them with sales ratios, you can easily identify which SKU ranges are working well and which are not.
SKU ratios. It is the percentage of total SKUs that are within a certain range of gross earnings. Suppose we have 100 SKUs throughout the business and we know your gross profit (price minus cost) of each one, we can establish how many of those SKUs are within each range of earnings within the business. For example, one range can contain 40% of the 100 SKUs, while another only has 5%.
Gross profit range. A series of ranges help you quickly categorize products based on benefits. For example: Less than €5, between €5 and €10, €10 to €20 or more than €20.
Sales ratio. This is calculated in the same way as a SKU ratio, but sales units are used instead of SKU. Therefore, you are calculating how sales units are divided by profit range.
What to do with this information? If we take the time to calculate both percentages, you can make graphs with the two variables to help us know which SKUs are generating the best returns for time and money required to serve them (i.e., promote, store, secure, etc...) For example, when the sales index in a profit range is higher than the SKU index, it means that those SKUs are working well, but when the SKU index is higher than the sales index, it means that those products have a lower performance.
It is important to keep in mind that this is a very manual approach to streamlining SKUs. An effective way for a company to analyze the performance of its SKUs is to use a Business Intelligence function integrated into inventory management systems.
Other useful SKU metrics
1. Days Inventory Outstanding
Days Inventory Outstanding (DIO) It measures the number of days that a particular product has before converting it into a sale (or manufacturing it into a product, etc.). Understanding this metric can help identify the products that are absorbing costs in your warehouse for too long. It is calculated by dividing the average value of the inventory by the cost of the goods sold, then multiplying that figure by the number of days in the measurement period (for example, 365).
If the DIO of a particular SKU is high, it means that they are not becoming sales very quickly, which could mean that the product is out of stock. A low DIO is good for the flow of stocks, but a very low DIO can mean that the company is not prepared for a sudden increase in demand, something that must be taken into account before carrying out new marketing campaigns for that product line.
2. Inventory turnover
Inventory turnover measures the number of times in a given period (usually one year) that the company sells the entire value of its inventory. It can be used to determine the effectiveness of the inventory, that is, sell the inventory quickly to reduce storage costs.
It is calculated by dividing the cost of the goods sold by the average value of the inventory. The resulting figure represents the number of times the entire inventory was sold in that period of time.
A low figure means that it has an excess of stock or that the products are simply not sold. By deepening billing by SKU, you can determine, at the individual product level, which products belong to the problem areas of the business.
3. Order Fulfillment Rate
This formula helps in the planning of the demand for certain products. Shows what percentage of orders is completed with all agreed order lines compared to the number of actual orders from customers.
It is calculated by dividing the first by the second: complete orders divided by the total number of customer orders sent, converted into a percentage.
A low compliance rate means that customers do not get what they paid for in a timely manner, which could generate low satisfaction and loss of future income. Compliance rates calculated with the help of SKUs can help identify items that are sold more than the predicted quantity, so that inventory levels can be better established in the future.