# SKU Rationalization Tail Cost Savings Calculator

> Source: https://netray.co/tools/sku-rationalization-tail-cost-savings-calculator
> Publisher: Netray (netray.co), AI and integration engineering for ERP and manufacturing systems.
> Section: Free Tools

## Short answer

Weighs the margin lost from dropping low-volume SKUs against complexity cost, carrying cost and write-offs, and shows the payback.

## Category

cost-finance

## Industry

Discrete Manufacturing

## Audience

- COO
- Plant manager
- Finance director
- Product manager

## Tool

**Kind:** calculator

**Currency:** $

**Inputs:**

#### Active SKUs today

**Key:** skus_total

**Type:** number

**Default:** 1800

**Min:** 1

**Step:** 10

**Unit:** SKUs

#### SKUs you plan to drop

**Key:** skus_dropped

**Type:** slider

**Default:** 300

**Min:** 0

**Max:** 800

**Step:** 10

**Unit:** SKUs

#### Average annual revenue per tail SKU

**Key:** rev_per_sku

**Type:** number

**Default:** 22000

**Min:** 0

**Step:** 500

**Unit:** $

#### Gross margin on tail SKUs

**Key:** gm

**Type:** number

**Default:** 34

**Min:** 0

**Max:** 100

**Step:** 1

**Unit:** %

#### Revenue that moves to remaining SKUs

**Key:** retained

**Type:** number

**Default:** 55

**Min:** 0

**Max:** 100

**Step:** 5

**Unit:** %

**Help:** Customers who accept a substitute or a standard item instead.

#### Annual complexity cost per SKU

**Key:** cost_per_sku

**Type:** number

**Default:** 9000

**Min:** 0

**Step:** 500

**Unit:** $

**Help:** Planning, setups, small lots, quality plans, master data, documentation.

#### Average inventory per dropped SKU

**Key:** inv_per_sku

**Type:** number

**Default:** 6500

**Min:** 0

**Step:** 250

**Unit:** $

#### Inventory carrying rate

**Key:** carry

**Type:** number

**Default:** 22

**Min:** 0

**Max:** 60

**Step:** 1

**Unit:** %

#### Share of dropped inventory written off

**Key:** writeoff_pct

**Type:** number

**Default:** 35

**Min:** 0

**Max:** 100

**Step:** 5

**Unit:** %

**Outputs:**

#### Share of SKUs dropped

**Key:** pct_dropped

**Expr:** skus_dropped / skus_total * 100

**Format:** percent

#### Revenue on dropped SKUs

**Key:** rev_removed

**Expr:** skus_dropped * rev_per_sku

**Format:** currency

#### Margin lost after migration

**Key:** lost_margin

**Expr:** rev_removed * (1 - retained / 100) * gm / 100

**Format:** currency

#### Complexity cost removed

**Key:** complexity

**Expr:** skus_dropped * cost_per_sku

**Format:** currency

#### Inventory cash released

**Key:** inv_released

**Expr:** skus_dropped * inv_per_sku

**Format:** currency

#### Carrying cost saved

**Key:** carry_saving

**Expr:** inv_released * carry / 100

**Format:** currency

#### Net annual benefit

**Key:** net_annual

**Expr:** complexity + carry_saving - lost_margin

**Format:** currency

**Primary:** true

#### One-time write-off

**Key:** writeoff

**Expr:** inv_released * writeoff_pct / 100

**Format:** currency

#### Payback on the write-off

**Key:** payback

**Expr:** if(gt(net_annual, 0), writeoff / net_annual * 12, 0)

**Format:** months

**Primary:** true

**Chart:**

#### Net annual benefit vs SKUs dropped

**Type:** line

**X:** skus_dropped

**From:** 0

**To:** 800

**Steps:** 17

**Series:**

- net_annual

**Disclaimer:** Assumes every dropped SKU matches the average. Real tails are uneven, so rank SKUs and run the cut from the bottom up.

## Content

**Intro:** Most plants carry a long tail of SKUs that earn little but cost a lot to plan, set up and stock. This calculator nets the margin you would lose against the complexity and inventory cost you would remove.

**Sections:**

#### How to use it

**Body:** Enter the count and average revenue of the tail you are considering, the gross margin on those items and how much of the revenue customers would move to a standard item. Complexity cost per SKU is the hardest input: estimate planner time, setups on short runs, quality documentation, master data upkeep and obsolescence. Use the chart to see how the benefit builds as you cut deeper, then check it against a ranked list from the ERP.

#### The method

**Body:** Lost margin applies only to revenue that does not migrate: revenue removed times one minus the retained share times gross margin. Complexity savings are the dropped count times the cost per SKU. Inventory released is cash, and carrying savings come from the carrying rate. Net annual benefit is complexity plus carrying savings minus lost margin. The write-off is a one-time charge for stock you cannot sell down.

**Bullets:**

- Retained share is the main sensitivity: test 30, 55 and 80 percent.
- Run-out plans reduce write-offs: stop building, sell the stock.
- Keep spares and contractual items out of the cut list.

#### Reading the result

**Body:** With the defaults, dropping 300 of 1,800 SKUs removes about $6.6 million of revenue, loses about $1.0 million of margin, and saves about $2.7 million of complexity cost plus $0.4 million of carrying cost. Net benefit is about $2.1 million with a payback under 4 months. If the net turns negative, the complexity cost estimate is the first number to challenge.

#### Common mistakes

**Body:** Plants cut by revenue alone and drop strategic customer items, or they claim complexity savings without a plan to change headcount or setups. Complexity cost is only real if it is removed. Use ERP sales history, order frequency and customer count by item to rank candidates, and check bill of material reuse before declaring a part obsolete.

**Cta:** Netray can help build a ranked SKU tail report from your ERP sales and inventory data, with order frequency, margin and customer concentration side by side.

**Faq:**

#### How do I estimate complexity cost per SKU?

**Answer:** Start from activity: planner hours, setups for small lots, inspection plans, document control and master data. Divide the cost of those activities by the SKU count. Treat the number as a range, because only part of it can be taken out.

#### What share of revenue typically migrates?

**Answer:** It depends on how substitutable the items are. Standard commodity variants can retain most of it, specialty items very little. Test several values and keep the decision where the result stays positive at the low end.

#### Should I include customer relationship risk?

**Answer:** Yes, qualitatively. Dropping a part that anchors a large customer can lose more than the item's own revenue. Flag those items and exclude them or give the customer a last-time-buy before you cut.

#### Is the carrying rate a cash saving?

**Answer:** Partly. Capital cost and storage are savings if space or borrowing is reduced. Obsolescence risk is avoided loss. Use a lower rate if you cannot show the space or cash is really released.

## Search terms

sku rationalization calculator, product line pruning savings, tail sku cost, cost of complexity manufacturing, sku reduction business case, dropping slow moving products, product complexity cost, portfolio simplification

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