SKU Meaning: Definition, Examples, and Benefits Explained

Having a tracking and organization system in place is crucial for retail and inventory management. One of the most fundamental components of tracking and organization is the Stock Keeping Unit (SKU). In this article, we’ll explore the SKU in greater detail, including its definition, purpose, and benefits for inventory management.

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What is an SKU?

An SKU, or Stock Keeping Unit, is a unique identifier assigned to each distinct product and service that can be purchased in business. SKUs are alphanumeric codes that help track and distinguish product inventory from other products within the same inventory system. SKUs are not universally standardized, meaning every retailer or business can create a system to suit the types of products they offer.ⁱ

The primary purpose of an SKU is to allow businesses to track inventory and the quantities of products on hand systemically. SKUs are instrumental for tracking and organizing, simplifying auditing and managing inventory. By using SKUs, businesses can track, monitor, and gather data on sales and inventory movements easily.

Benefits of Using SKUs

Implementing an SKU system in your business has many benefits for a business:

Improved Inventory Management

Using SKUs significantly improves inventory management for businesses for a variety of reasons. Having an SKU system in place enables businesses to have more precise visibility and control over stock levels and manage accordingly.

By assigning a unique identifier to each item, businesses can easily monitor which products are in stock, which are running low, and which are overstocked. That kind of visibility allows businesses to prevent both out-of-stock scenarios and overstocking, which would otherwise negatively impact the business and potentially cause financial issues.

Visibility into trends and sales

SKUs give businesses a window into current consumer trends and provide detailed, accurate sales analysis. By keeping track of which products are selling and which aren't, companies can make informed decisions on what to keep selling, what to discontinue, and where there is room for promotion. This insight into consumer trends can enable businesses to feel more informed and strategic when making decisions.

Streamlined Operations

SKUs are also beneficial for companies looking to streamline operations across multiple departments. They allow teams to better understand what products should be reordered and predict demand better for future orders. From a logistics standpoint, SKUs make it easier for warehouses to locate products quickly, speeding up the process of order picking and shipping for faster delivery.

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How SKUs Work

An SKU typically consists of a series of alphanumeric characters, with each part holding specific information about the item it represents. The components of a SKU will differ based on the product, but they typically include information about the product type, manufacturer, material, size, color, and other relevant characteristics.

An example SKU for a shirt might start with a prefix that indicates the category (e.g., ‘SH’) followed by other characters representing the manufacturer, size, and color. This systematic breakdown helps with tracking and locating products but also serves as a quick reference for inventory management.

The format of an SKU can vary significantly based on the product type, business, inventory, management systems, or other factors. Generally, businesses develop an SKU system that’s both logical and scalable and makes sense based on their general context.

Effective SKUs should be concise but also have enough description to provide meaningful information at a glance. It’s also best to avoid letters and numbers that could easily be confused for one another. When designing an SKU format, it’s also important to consider how easy it would be to add new products and variations without needing to redo the entire system.

When setting up an SKU code system, it’s best to use a combination of internal codes that denote supplier information, product categories, and specific item details. That structure helps maintain inventory and can speed up performance and sales analysis across different product categories.

Examples of SKUs

Product Category	SKU Example	Description
Apparel	SHRT-BLU-MED	Blue Shirt, Medium Size
Electronics	LAPT-HP-15BLK	HP Laptop, 15-inch, Black
Home Goods	CUSH-GRY-LRG	Grey Cushion, Large Size

How to Create Effective SKUs

Step 1: Identify Key Attributes

The first step in creating effective SKUs is identifying the key attributes that will make up each SKU. Your chosen attributes should reflect the most important characteristics of the products, such as type, size, color, style, or material. The attributes should also be relevant to any further tracking or analysis you may want to do moving forward.

Step 2: Develop a Consistent Format

Once you’ve identified the key attributes, the next step is to develop a consistent format for your SKUs. The format should be logical and structured to align with internal processes and easy for employees to understand and use.

When developing a format, a few considerations can help develop a SKU format that works for you. Keep your SKU length short (most range between 8-12 characters), and divide it into segments that reflect important attributes. You can also decide on a coding system that’s easily understandable and reduces any chance of error. Prefixes and suffixes can also help with tracking broader categories if needed.

Step 3: Avoid Common Pitfalls

WAfew pitfalls can be avoided twhen developing SKUs o keep inventory systems operating effectively.

While it's crucial to capture essential product attributes, overly complicated SKUs can lead to errors and confusion. Similarly, having inconsistent formats across different product categories or departments can lead to significant challenges in managing inventory and analyzing data. Adding ambiguous characters may cause issues such as misreading or scanning errors, so it’s best to avoid those.

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Best Practices for Using SKUs

Having a strategy and best practices in place can help manage, maintain, and implement a consistent, scalable SKU system. It’s crucial to keep reviewing and updating SKUs as product offerings evolve. Your SKUs should be able to accommodate new products, product changes, and other shifts without requiring a total overhaul.

It’s also vital to provide comprehensive training to all staff members, especially those involved in inventory management, purchasing, and sales. Any staff involved in these areas should understand how SKUs are structured, what each segment represents, and how to use them in their day-to-day work.

To scale your SKU system, you can also integrate it with other technological tools such as barcode scanners, inventory management software, and point-of-sale (POS) systems. For instance, barcode scanners can be used to quickly identify and update product information, while inventory management software can provide real-time updates on stock levels. POS systems can automatically update inventory records when a sale is made, reducing the likelihood of human error in inventory handling and sales processes.

Common Questions About SKUs

What is the difference between an SKU and a UPC?

Distinguishing between an SKU and a Universal Product Code (UPC) is crucial for managing inventory and identifying products effectively. SKUs are specific, unique, customizable alphanumeric codes used by retailers to track and manage inventory internally. A UPC is a

12-digit numerical code that uniquely identifies a product and its manufacturer. It is standardized for global use and is the same for any given product regardless of where it is sold.

Can two products have the same SKU?

No, two distinct products should not have the same SKU. Each SKU is designed to be a unique identifier specific to a single item in a retailer's inventory.

What are the 4 types of SKU?

SKUs can be classified into four distinct types, but there are broader ways to organize SKUs if needed. Generally, SKUs can be organized based on several aspects of inventory management and product differentiation.

The four types of SKUs that are generally used include product type, seasonal, promotional, and geographic SKUs. The latter is most relevant for businesses operating in multiple locations or regions to track and analyze sales data across regions and locations.

How do SKUs help in e-commerce?

SKUs are incredibly important for e-commerce for various reasons. They are useful in operations and streamlining processes. They provide a systematic approach to inventory management, simplify the order fulfillment process, and allow for detailed sales tracking and analysis.

Do I need to use SKU codes?

Whether you need to use SKU codes largely depends on the size and complexity of your business operations. However, even for small-scale operations or startups, SKU codes can offer early advantages in inventory management and customer service. For larger businesses, SKUs are essential for operational efficiency, data analysis, inventory management, and customer service.

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Conclusion

Implementing a well-designed SKU system can significantly impact the efficiency and scalability of business operations, especially as your business grows and evolves. Whether a small business or large, SKUs have many benefits and can provide an effective and easy method of managing inventory and sales.

The decision to implement SKU systems should also take into account the business's current needs and future growth. SKUs can provide deep insight into operations and potential efficiencies, where customer preferences are moving, and shape sales strategies moving forward.

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Sources:

1. SKU: What It Is and How It Works | Investopedia