Is it time to go on a SKU diet? When to dropship, stock, order as needed, or stop selling a part altogether

Offering a large, diverse inventory of items is a huge source of value in the OEM aftermarket. Stocking the complete maintenance catalog for a product, for example, or allowing customers to find everything they need in one place, can be a major source of competitive advantage. 

However, over time, the associated costs and complexity can weigh heavily on a business. A “SKU diet” — streamlining your inventory by deciding which items to dropship, stock, order as needed, or discontinue — can improve efficiency, reduce costs, and enhance customer satisfaction. In this article, we’ll outline a strategy for achieving these benefits.

Dropshipping

Dropshipping is when a supplier directly fulfills orders on your behalf, meaning you don’t hold inventory yourself. This reduces holding costs and the risk of overstock, but has downsides as well.

Dropshipping considerations

  • Availability: Does the supplier even offer direct shipping to your customer? Most overseas suppliers rarely offer dropshipping, and it might be impractical.
  • Delivery performance: How long does the supplier take to deliver compared to your DC? If suppliers have long dropship processing times, that would be a reason to avoid using their service. Ditto if the supplier’s packaging and presentation is not up to your own standards.
  • Freight cost + fees: Any multi-item customer order that involves a dropshipment will now have at least two total shipments per order, likely arriving to the customer on two different dates. This increases your total freight cost and also inconveniences the customer. Any dropshipment fees charged by the supplier are also a factor.
  • Unit cost / bulk: Large or expensive items can be a great fit for dropshipping since stocking those products has such a high cost.
  • Sales demand: When you stock a low-volume product, inventory turns, service levels, and the risk of excess stock are all worse than they are for strong sellers. Slow sellers are thus often a better fit for dropshipping.

Just-in-time shipping (i.e. “order as needed”)

Ordering a product only when demand occurs allows you to avoid the cost and risk of holding inventory. You are effectively cross-docking the product from your supplier to your customer, through your DC receiving dock. Just-in-time is a good solution for products you would otherwise dropship, but are a bad fit for dropshipping.

Considerations for just-in-time shipping vs dropshipping

  • Availability: Unlike dropshipping, assuming that you allow customers to backorder product, you always have the option to sell an item that is bought from the supplier only as needed.
  • Lead time: Compared to dropshipping, lead time is longer, since the order has to arrive at your DC before it is shipped to the customer. And both options are of course slower than if you stock the product in your DC. As with dropshipping, imported items are usually a poor fit for just-in-time, due to lead time.
  • Cost: Labor costs in your DC increase, since every sale also results in a receipt. Also, like dropshipping, freight costs will be higher, since you have to pay inbound and outbound shipping on a second shipment.

Stocking a product in your DC

Stocking a product usually provides the best customer experience. Lead time is minimized, you have the most control over packaging and presentation, and if all lines are in-stock, you can deliver the order in a single shipment. Of course, this option carries the most inventory risk.

Good attributes for stock products

  • High sales demand:​ Items with high sales volumes and consistent demand.
  • High affinity:​ Items that are commonly part of large customer orders should be prioritized for stock, to reduce the chance that multiple shipments will be required, or that an order will be held up by one out-of-stock item.
  • Reasonable size / cost:​ Pricey or bulky products are less appealing as stock items.
  • Lack of alternatives:​ All else being equal, items with long supplier leadtimes or high dropshipping costs are better suited for stock.

When to stop selling a product altogether

At some point, it simply isn’t sensible to sell an item. Even if gross margins are good on paper, removing it from your offering may be more economical if the fully loaded cost of selling the item is too high.

Qualities of candidate SKUs for discontinuation

  • Equivalent Products: If you offer another product that can fulfill the same application, it becomes less important to offer an equivalent item.
  • Low Demand: Items with minimal sales history or declining demand, especially if demand is sporadic (which increases the risk that a period of high activity could lead you to overstock).
  • Low Margin: The lower your gross margin is, the harder it is to sell an item at a profit, especially if it exhibits other attributes on this list.
  • High Holding Cost: Expensive, bulky, and hazardous items are all more expensive to handle, stock, and sell.
  • Long Lead Time: Long leadtimes basically multiply the cost of forecast error, since you are effectively predicting sales (and purchasing inventory) to cover longer and longer periods into the future. Since dropshipping and just-in-time are generally not a good fit for long lead time items, discontinuing becomes more attractive.

Case study: Successful SKU optimization

In 2022, Hydrian implemented a SKU rationalization program (i.e. “SKU diet”) for a long-time client, a $150MM revenue aftermarket and OEM parts distributor. After working with the client to establish parameters for deciding how to classify their existing catalog, the following was achieved over the course of the next year:

  • Stocking SKUs went from 14,500 to 8,250.
  • The number of products offered on dropship (9,000) remained stable, with around 2,000 products being removed from dropship programs and another 2,000 items being added.
  • Just-in-time products went from 4,500 to 5,500.
  • Over 4,000 products were discontinued.
  • Fill rates increased from 86% to 94%.
  • Inventory turns increased from 3.3 to 5.5.
  • Gross profit increased from 34% to 36%.
  • Revenue increased 8%.

Conclusion

SKU management is crucial for businesses looking to improve efficiency and profitability. By strategically deciding which items to dropship, stock, order as needed, or discontinue, businesses can reduce costs, streamline operations, and enhance customer satisfaction. Implement these strategies to ensure your inventory is aligned with market demand and your business goals.

You might also like

Navigating inventory management challenges for SMEs​

Running a small to medium-sized enterprise (SME) is no easy feat.

AutoZone’s push for more distribution centers: When does expanding your DC network have diminishing returns?

AutoZone has recently made headlines with its aggressive construction of new distribution centers (DCs) referred to as “mega hubs.”

Shelf life: How to avoid losing money to expired or obsolete parts

Managing shelf life and obsolescence is a significant challenge in the automotive parts industry.

Subscribe to our newsletter

Get updates on the latest news across all core inventory-related processes.

Subscribe now!

Subscribe

Your email is safe with us, we dont spam.

Want to see how your inventory management stacks up?

We’re so confident in our results, we offer a free performance assessment to all prospective clients. This isn’t a canned sales deck – it’s a bespoke presentation that takes 20 hours of our time. Whether we work together or not, we promise you’ll walk away with useful insights that will improve your business.