⚰️ The SKU Graveyard: Products Quietly Eating Your Profits

Welcome to The Ops Digest!

Each week, we drop no-BS insights + one AI prompt to cut wasted costs, tighten workflows, and eliminate manual grunt work.

Today: bloated SKU lists, invisible carrying costs, and the products you’re paying to store instead of sell.

⚰️ The SKU Graveyard: Products Quietly Eating Your Profits

You have 5,000 SKUs in your catalog. You know your top 500 products drive the bulk of your business.

But what about the other 4,500?

The Pareto Principle applied to inventory management consistently shows that roughly 80% of revenue comes from just 20% of SKUs. The remaining 80% of your products are generating only 20% of sales while consuming warehouse space, tying up working capital, and requiring the same cycle counts as your best sellers.

Many of these are "zombie" SKUs - technically alive in your system but barely moving. Some haven't sold in over a year. Others sell occasionally but cost more to pick, pack, and ship than the margin they generate.

Every day they sit in your warehouse, they're silently draining your profits.

📊 The True Cost of Dead Inventory

Most distributors dramatically underestimate what it costs to hold inventory. According to industry benchmarks, inventory carrying costs typically range from 20% to 30% of inventory value annually. Wholesale distribution often runs toward the higher end - 25-40% - due to longer holding periods and larger facilities.

Those carrying costs include capital costs (opportunity cost of money tied up), storage costs (space, utilities, handling), service costs (insurance, taxes, systems), and risk costs (obsolescence, damage, shrinkage).

Research on dead stock indicates that 20% to 30% of inventory becoming dead stock is common even for healthy businesses. The longer inventory sits, the more likely it becomes completely obsolete.

💰 The Rationalization Opportunity

SKU rationalization delivers real financial impact. According to research and case studies:

• 15-25% reduction in warehouse expenses by eliminating underperforming SKUs

• 20-30% working capital release when eliminating bottom-performing inventory

• Up to 25% improvement in inventory turnover (McKinsey)

• Up to 8% margin increase for companies that excel at rationalization (McKinsey)

A case study from Inbound Logistics illustrates the opportunity: A craft supplies distributor with 5,000 SKUs found only 2% - just 105 products - were A-items. Over 4,000 SKUs generated only 5% of annual sales while consuming resources.

Dead SKUs aren’t the only margin leak. Manual order processing is another.

Y Meadows automatically reads customer orders, validates part numbers, quantities, and pricing, and pushes everything straight into your ERP. No process change, no new system. Just no more manual order entry.

👉 See How Fabral Eliminated Manual Order Entry (90 sec case study) →

📋 Preparing Your Data for Analysis

Before running an AI analysis, you'll need to export inventory and sales data from your ERP. Here's what to gather and where to find it:

Required Data Fields:

• SKU / Item Number

• Description

• Product Category

• On-Hand Quantity

• Unit Cost

• Last Sale Date

• Sales Last 12 Months (units and dollars)

• Number of Orders Last 12 Months

• Number of Unique Customers Who Ordered

Where to Find This Data by ERP:

SAP:

• MC46 – Slow-Moving Items Analysis

• MC50 – Dead Stock Report

• MC.9 – Inventory Analysis

• MB5B – Stocks for Posting Date (for aging by period)

Microsoft Dynamics 365:

• Inventory Aging Report (Cost Management > Reports)

• Inventory Aging Report Storage – for large datasets with export to Excel

• ABC Classification Report – for revenue/margin ranking

Oracle NetSuite:

• Inventory Aging Report (via Saved Search or SuiteLet)

• Stock Ledger – for SKU activity across periods

• Inventory Turnover Report (Reports > Inventory)

• Inventory Profitability Report – for margin analysis

Sage / Epicor:

• Inventory Valuation Reports with aging buckets

• Item Sales History reports filtered by date range

• ABC Analysis or Inventory Ranking reports

Export to CSV or Excel, then paste directly into the AI prompt below.

🤖 The AI Analysis Prompt

Once you have your data exported, upload it to Claude/ChatGPT and use this prompt:

Analyze our inventory to identify SKUs that should be discontinued or rationalized:

[Paste inventory data here]

For each SKU, calculate:
1. Days since last sale
2. Annual turns (units sold / average on-hand)
3. Customer concentration (% of sales from top customer)
4. Revenue per pick (total revenue / number of orders)
5. Estimated carrying cost (on-hand × unit cost × 25%)
6. True contribution: Revenue minus COGS minus allocated carrying cost

Flag SKUs in these categories:
- DEAD: No sales in 12+ months with inventory on hand
- DYING: Declining sales trend, below 1 turn per year
- ZOMBIE: Still ordered but unprofitable per pick (revenue < $50/order)
- ONE-CUSTOMER DEPENDENT: 80%+ of volume from single customer
- SPECIAL-ORDER CANDIDATE: Low volume, high variability, easily sourced

Output Format:
- Executive summary: Total capital tied up in underperforming SKUs
- Category breakdown showing SKU count and inventory value by classification
- Recommended actions for each category:
  - DEAD: Liquidate, donate, or scrap—with estimated write-off
  - DYING: Accelerate sales with promotion or discontinue
  - ZOMBIE: Add minimum order quantity or discontinue
  - SPECIAL-ORDER CANDIDATES: Remove from stock, convert to drop-ship
- Top 50 SKUs to discontinue immediately with full analysis
- Estimated working capital release from rationalization program

🎯 What You May Discover

Common findings from this analysis include:

• Products that haven't moved in over a year still occupying prime warehouse space

• "Customer special" SKUs that never generated recurring business

• Items that look profitable on gross margin but lose money when carrying costs are allocated

• SKUs entirely dependent on a single customer who could leave at any time.

🔧 Taking Action

• Start with the obvious wins. DEAD inventory (no sales in 12+ months) should be liquidated, donated, or written off immediately. Partner with liquidation channels or offer clearance pricing to existing customers.

• Convert slow-movers to special-order. Keep items in your catalog but remove them from stock. Customers can still order with appropriate lead times communicated upfront.

• Establish SKU governance going forward. Create a formal process for adding new SKUs that includes projected velocity, margin requirements, and a sunset review date. Make rationalization a quarterly discipline rather than a one-time cleanup.

💡 The Bottom Line

Your ERP is a graveyard of good intentions. Every SKU was added for a reason - but the market moves on, customers' needs change, and yesterday's opportunity becomes today's dead weight.

The most profitable item you can "sell" might be one you stop stocking entirely.

Run the analysis. Identify the zombies. Free the capital.

Your warehouse - and your balance sheet - will thank you.

Ready to stop bleeding margin on every order?

Y Meadows brings AI-powered automation to order management. While SKU rationalization frees capital from dead inventory, automating your order entry ensures every order that does come in is processed efficiently—eliminating manual entry and the errors that come with it.

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