Stock Keeping Unit: What Is It and Why It Matters For Your Business

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How do online retailers track every product they sell? They use a SKU, or stock keeping unit. This unique code simplifies sorting and labeling each item. Companies internally create SKUs and incorporate them into inventory management systems to keep everything organized.

In this article, you’ll learn about SKUs, understand their importance, and find out how to use them for your business. 

What is a stock keeping unit (SKU)?

A stock keeping unit is a specific code that retailers use to manage the items they have for sale. Made up of both letters and numbers, this code gives details about a product, like its brand, color, and size. For instance, a green medium-sized shirt from Brand X might have a SKU like “BRANDX-GREEN-M.” 

Each company has its own SKU system for the products it sells, so even if two stores sell the same item, their SKUs might be different. SKUs help companies keep track of their stock efficiently, and while they are distinct from model numbers, some businesses might use model numbers in their SKUs. 

Why SKUS are important?

SKUs help shoppers differentiate between products. Imagine an online store selling a wide array of mystery novels. When a customer selects a particular book, the store, using SKU details, can suggest other mystery novels that previous customers purchased. These tailored suggestions can lead to additional purchases, boosting the store’s profits.

Moreover, SKUs help retailers maximize their sales data. By tracking which SKUs shoppers scan at checkout, an online store pinpoints its bestsellers and underperforming items. This insight allows it to make informed decisions about inventory management, such as when to restock popular items or adjust the marketing or display of slower-moving products.

Other practical applications of SKUs include:

  • Establishing product reorder thresholds
  • Reconciling stock levels
  • Identifying shrinkage in inventory
  • Improving inventory tracking accuracy

How to calculate SKUs

To calculate your stock keeping units, think of every distinct version of your product. This could be variations in flavor, package size, or even design. The number of SKUs you have is the total of these different product options.

Consider you’re a seller of gourmet popcorn. You have popcorn in two flavors: cheese and caramel. You offer them in two sizes: regular and jumbo. And, there are two types of packaging: tin and box. 

So with two flavors, two sizes, and two packaging choices, you end up with 2 x 2 x 2 = 8 product combinations. That means you have eight SKUs.

Where SKUs are used 

SKUs are typically used in:

  • Retail stores
  • Warehouses
  • Brick-and-mortar stores
  • Product fulfillment centers
  • Ecommerce vendors

How are SKUs formed?

Companies create unique SKUs, and each has its own distinct method.

For instance, imagine a blue Adidas running shoe in the Ultra Boost design, size 9. Its SKU might look like this: ADI-UB-BLUE-09. 

Similarly, a container of Sunburst mango juice, sugar-free version, in a 50-ounce tin can could get a SKU from a local grocer like this: SUNB-SF-TIN-50. 

While there’s no universal formula for crafting a SKU, it’s crucial for a company to establish a consistent system. This ensures everyone in the organization follows the same approach and can easily decode the SKU. Above all, SKUs should be straightforward, allowing anyone to understand them without requiring special tools. 

How are SKUs used by 3PLs?

When a retail store teams up with a third-party logistics (3PL) provider, SKUs come into play. These codes are vital for tracking both incoming and outgoing stock.

Here’s how it works:

  1. The 3PL will ask for your SKU count. This tells them how much space you need and hints at the complexity of your inventory.
  2. For quick and accurate order fulfillment, 3PLs will give each SKU its own spot in the warehouse. This method speeds up the picking and packing process.

3PL services powered by SKUs include:

  • Syncing with your online store to update inventory automatically
  • Showing live counts of each item in stock
  • Alerting you when stocks dip to levels where you need to reorder
  • Creating bundles for promotions using different SKUs
  • Keeping your product listings the same across all sales channels

Overall, 3PLs use SKUs to improve how they manage your inventory and to offer services that help your online store succeed.

Best practices for effective SKU management

To manage SKUs effectively and keep your inventory systematic and organized, follow these steps:

  1. Simplify SKU creation. Develop a clear and concise approach for creating SKUs. Use a logical structure, such as “brand-color-size,” to make it easy to understand at a glance. Stick to uppercase letters for consistency and avoid characters that can be confused, like O and 0.
  2. Calculate optimal reorder quantities. Adjust your ordering strategy based on actual sales data. Use the formula: Optimal Reorder Quantity = Average Daily Units Sold × Average Lead Time. This helps you keep your inventory levels balanced, avoiding both shortages and excess stock.
  3. Group similar items together: For products with variations, organize SKUs by common features like color or size. If you’re selling a shirt in three colors, keep those SKUs together. This makes supply chain management smoother and helps customers find product variations they like more easily.
  4. Review and adjust. Continuously evaluate the performance of your SKUs. If certain items are consistently underperforming, consider discontinuing them to free up resources and space. Remember, offering a wide range of options can sometimes be counterproductive by overwhelming your customers. Focus on your bestsellers and refine your product offerings based on sales data and customer feedback..

SKU management doesn’t have to be complex. By adopting a systematic and organized approach, businesses can ensure their products are always in the right place, at the right time.

Taking action with SKUs

SKUs are the key to smooth operations. They help sort inventory, make orders right, and reduce mistakes. By using these unique codes, you can lessen errors, make returns simpler, and build a stronger supply chain.

Stock keeping unit FAQ 

What is a stock keeping unit, with example?

A stock keeping unit (SKU) is a unique identifier that a manufacturer or retailer assigns to a product. It’s typically associated with an item’s bar code and is used to track inventory. For example, the SKU for a specific black t-shirt could be P1MT229TB166BK. This would serve as a unique identifier for that product, helping merchants identify it via a bar code. (To create a bar code from your SKU code, try Shopify’s free bar code generator).  

What is the difference between a UPC and a SKU?

Universal product codes (UPCs) are 12-digit numbers with bar codes representing products universally and remain consistent across all retailers. Conversely, stock keeping units (SKUs) are unique identifiers chosen by individual retailers or manufacturers for their internal tracking of inventory. A product might have different SKU codes across two or more stores, but its universal product code will always be the same.

What does SKU mean in manufacturing?

In manufacturing, a SKU is like a name tag for products. It’s a unique code—each product gets its own. This code helps makers find items fast and keep their stock in order.

What a SKU is not

People often think of SKUs as bar codes, but they serve different purposes. Store products have bar codes called UPCs, which identify the same type of products no matter where they’re sold. SKUs, however, also show who is selling the product. While UPC bar codes only contain numbers, SKUs include both letters and numbers and their length can vary.

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