Segmenting SKUs to Target Inventory Cost and Service Levels

Brian Streu has more than 20 years of experience in supply chain and indirect procurement and 10 years in supply chain design, and he argues that managing each SKU separately becomes unsustainable once a portfolio reaches thousands of items. His stated expertise includes network optimization, inventory optimization, simulation and data management.

At St. Onge Co., where he serves as senior project engineer for Strategy & Logistics, Streu says companies face three simultaneous demands: high service, limited inventory investment and controlled operating costs. His proposed answer assigns different policies to products with different demand, value and risk profiles.

What does product segmentation change?

Segmentation groups products by shared demand patterns, profitability, variability and customer requirements. The method replaces one service target, replenishment rule and planning cadence for every SKU with policies designed around how products actually behave.

Streu says the approach reveals where value concentrates, which products drive risk or variability, how demand differs and where working capital sits. It also identifies a commercial failure mode of blanket planning: excess low-value stock, shortages of critical SKUs and avoidable operating complexity.

The article uses ABC-XYZ segmentation as its principal example:

• ABC measures financial importance, separating high-value “A” items from low-value “C” items.
• XYZ measures demand predictability, separating stable demand from volatile demand.

Together, the two dimensions let a company focus attention and resources on the products that matter most. That avoids the impractical task of optimizing every SKU independently, although the source does not specify the thresholds, number of segments or data required.

What happens to service levels and working capital?

Streu identifies three policy levers for putting the segmentation into operation:

• Service levels: Give high-value or strategically important products higher availability targets, while allowing less critical SKUs to operate with lower service levels.
• Inventory investment: Increase safety stock for high-value, unpredictable items, reduce inventory for stable or low-impact SKUs, and eliminate or rationalize slow-moving and non-performing products.
• Replenishment and planning: Use continuous replenishment for high-volume, stable SKUs, periodic review for mid-tier items, and make-to-order or minimal stocking for low-value or erratic products.

Applied at segment rather than SKU level, these rules standardize planning while allowing deliberate trade-offs between availability and cost. A critical product can receive a higher availability target, while a low-impact item receives less capital and a lower service promise.

For shippers, the commercial test is whether working capital falls without service failures on critical SKUs. For carriers and freight forwarders, however, the article changes no quoted rate, TEU, tonnage, transit time or capacity commitment; it supplies no direct commercial benefit for transport providers.

That distinction matters because a generic inventory method cannot establish freight savings, lane effects or carrier capacity changes. Any claim that segmentation will lower transport cost would require shipment, spend and service data that this source does not provide.

Does segmentation reduce complexity or add another layer?

Although segmentation creates more categories, Streu says it reduces execution burden in portfolios with thousands of SKUs by replacing item-level customization with common rules within each segment. He writes: “Rather than managing each SKU independently, segmentation allows companies to apply standardized policies at the segment level, dramatically simplifying execution.”

That approach gives inventory, sourcing and service teams shared planning rules. It also reduces firefighting by matching policies to product behavior and improves alignment among planning, procurement and operations.

Segmentation can expose low-value, low-volume and erratic products as rationalization or discontinuation candidates. That may simplify the network and reduce cost, although the article does not say how many products a company would remove or how it would protect service during rationalization.

How do policies follow business priorities and volatility?

Each segment can carry a different objective:

• Growth segments prioritize availability and responsiveness.
• Cost-efficiency segments optimize for low-cost operations.
• Strategic segments receive investment in resilience and supplier reliability.

Demand and customer expectations also change at different speeds, so Streu recommends three corresponding operating responses:

• Manage fast-changing or trend-driven products through shorter planning cycles.
• Run stable products through automated, low-touch processes.
• Apply exception-based management to volatile items.

These choices let companies respond without applying the same planning rhythm to every item. Shorter planning cycles handle trend products, automation handles stable lines and exception management absorbs volatility.

Segmentation also lets management set segment-level objectives rather than trying to maximize service and minimize cost everywhere at once. In practice, that trade-off remains a promise until the company defines targets and measures outcomes.

What would prove the approach works?

The source presents an operating framework, not a measured case study. It reports no baseline or target for service level, inventory, working capital or operating cost, and it does not quantify the cost or time required to build and maintain the segmentation.

It also leaves open several execution questions: when to refresh segments, who owns exceptions, how supplier reliability changes under a “strategic” label, and what evidence justifies a make-to-order policy. Those omissions do not invalidate the method, but they limit any claim of a guaranteed competitive advantage.

Streu’s broader argument is that segmentation has become a foundational capability, not a “nice-to-have.” If companies move from blanket rules to segment-level service, stock and replenishment policies, the measurable test will be lower excess inventory without weaker availability on critical products. Until buyers publish results, that trajectory remains a management thesis rather than a proven freight outcome.