Stock Keeping Unit (SKU) – Definition, Importance and Example

A stock-keeping unit (SKU) is a scannable barcode that is most commonly seen printed on product labels in retail stores. The tag allows retailers to automatically track inventory movement. A SKU consists of an alphanumeric combination of eight or so characters. Characters are a code that tracks price, product details, and manufacturer. SKUs can also be used for intangible but billable products, such as auto body repair time units or warranties.

Understanding Stock Keeping Units (SKUs)

SKUs are used by stores, catalogs, e-commerce retailers, service providers, warehouses, and product fulfillment centers to track inventory levels. Scannable SKUs and a POS system mean it’s easy for managers to identify which products need to be replenished. When a customer purchases an item at the point of sale (POS), the SKU is scanned and the POS system automatically removes the item from inventory and records other information such as the sale price. SKUs should not be confused with model numbers, although businesses may put model numbers into SKUs.

The Importance of Stock Keeping Units

SKUs allow shoppers to compare features of similar items. For example, when a buyer buys a specific DVD, online retailers can display similar movies purchased by other customers based on the SKU information. This method can trigger additional purchases from the customer, thereby increasing the company’s revenue. SKUs also allow you to collect sales data. For example, a store can see which items are selling well and which aren’t based on scanned SKUs and POS data.

What are SKU codes used for?

As we noted, SKUs are used to identify and track products. They are absolutely crucial in any warehouse, manufacturing or retail environment as they simplify inventory management and analysis by ensuring your people speak a common language. There can be no confusion as to which make, model, make or product specification the customer ordered as there is only one code for each permutation.

How Do SKUs Work?

Each alphanumeric character in the SKU represents information related to the product, such as price, size, style, color, and manufacturer.

Since the codes are unique to each company, they can be customized to meet the needs of the business. For example, the information in the codes can be based on what customers usually ask.

C1 could be assigned to wool sweaters, while C2 could represent cotton. B1 can refer to red and B2 to blue. If S11 stands for small and S12 stands for medium, then the SKU of the small red cotton sweater would be C2B1S11.

The more detailed the information, the longer the data. This can be more confusing for workers, leading to a greater risk of shipping or packaging errors. Thus, retailers often stick to the most important product features when creating SKUs.

What Are SKUs for?

SKUs make it easy to track stock movements. In addition to helping retailers manage all of their inventory, these codes can offer several other benefits.

• Classification of products

Retailers with several variations of a particular type of product can use SKUs to differentiate each one. By adding unique product codes, they can prevent confusion at all levels of the supply chain. This can help minimize costly errors.

• Supply Management

SKUs can be used to track and manage inventory. Managers can use these codes to ensure that inventory does not decrease. Products tend to get damaged or missing at any point in the supply chain. SKUs make it easy for managers to pinpoint items. They can also use codes to determine if it is a theft.

• Restocking

Managing large amounts of inventory can be overwhelming for businesses of all sizes. But with SKUs, managers can easily determine the amount of products they have on hand. They can re-order when stocks run low to ensure they never run out of a product, especially the most popular ones.

• Identification of profits

SKU tracking can provide entrepreneurs with critical business insights. They can determine which product variant will sell out quickly. Similarly, they can identify which ones are less popular. These insights can help businesses make informed decisions that make them more profitable.

• Sales trends

Retailers can collect data from their SKU system and determine seasonal trends based on different customer segments. This allows them to replenish inventory based on expected customer behavior, allowing them to increase profitability and customer satisfaction.

• Customer support

SKU scanning makes it easy for retailers to provide product information to consumers looking for alternative versions. This can increase customer satisfaction and improve sales efficiency.

In retail stores, salespeople won’t have to go back far to the supply room to check if certain products are still in stock. They can simply scan the code with a portable scanner and verify this information.

• Advertising and marketing

Based on data obtained from SKU systems, retailers can determine the advertising and marketing methods that generate the most sales.

Where SKUs are Used

You will typically find the stock-keeping unit in use in:

• Warehouses
• Retail stores
• Catalogs
• Etailers
• Product fulfillment centers

Applications of SKU with an example

Consider a man named Shekhar who owns a large clothing store. He has 11 different brands of pants in his clothing store. However, he does not install the SKU on all pants himself, but only on those that are put on by the manufacturer. Shekhar thinks that SKUs are not essential. If a buyer comes, it will help him find the product.

The next day, a customer comes and asks Shekhar to bring out a particular pair of trousers of a particular brand. Unfortunately, these pants have no SKU. Shekhar searches his level best to find her but gives up after a few minutes. He apologizes to the customer and scolds himself for not attaching a SKU to each brand.

This incident makes Shekhar want to install SKU on every outfit regardless of brand. He contacts his inventory manager and requests immediate SKU retrieval for each item. His inventory manager follows suit, incorporating a SKU for each product in his store.

This move greatly helps Shekhar as his inventory is sorted into easily recognizable charts. Now he can manage his inventory with maximum efficiency. He knows if he has specific brands of pants and even knows how much stock he has left in his inventory. He can view every detail of his inventory on his computer and through analytics, he can recognize which brand of pants is selling the most and act accordingly.

SKU Benefits:

• Stock-keeping unit (SKU) help differentiate a product from another
• Stock-keeping unit (SKU) help in quickly searching for a product
• It helps reduce errors in product storage and product shipping
• It allows you to optimize your product catalog management
• It helps in inventory tracking, inventory management, performing various analysis related to inventory and sales
• Facilitates the analysis of customer behavior
• Properly generated Stock-keeping unit (SKU) result in the raw material and packing material cost savings
• Stock-keeping unit (SKU) help in sales forecasting and production planning
• It helps in analyzing current trends and remarketing products on social media platforms
• Stock-keeping unit (SKU) help in providing a world-class in-store experience
• It helps to define a robust inventory management mechanism to avoid out-of-stock situations
• Stock-keeping unit (SKU) help in knowing the exact location of the product
• Stock-keeping unit (SKU) help in reducing the instances of inventory shrinkage
• It helps in optimizing inventory accounting costs as it allows you to identify slow moving items
• It helps to improve the inventory turnover ratio and reduce dead stock
• Stock-keeping unit (SKU) help in grouping the products and inventory management by ABC analysis method

Limitations

• More about internal metrics: Although it is believed that sales promotion can be done based on SKU, but the consumer does not know about the SKU, this is an internal metric, therefore sales promotion is more practical at the UPC level and can be imitated by competitors.
• Code should be easy: The storage unit code should be easy to understand and therefore may contain special characters or cannot be encrypted. This can give competitors a better chance to anticipate the organization’s strategy and better plan their actions. However, highly innovative technology is used to create the SKU, making it difficult to decipher.

What is SKU rationalization?

SKU rationalization is the process of determining the cost-effectiveness of a product by using SKU codes against inventory and sales data to create detailed profitability reports. By understanding the complete lifecycle and value of individual products, organizations can make informed decisions about whether to discontinue a product or refocus their marketing efforts.

This process is sometimes also called inventory optimization or product optimization.

SKU rationalization can help you:

• Terminate unprofitable SKUs
• Reduce stock out by detecting SKUs with high waste
• Improve inventory forecast accuracy
• Reduce inventory holding costs
• Optimize supplier relationships based on sales value
• Optimize team size based on new inventory needs

How do you generate a SKU?

You are free to generate SKUs as you see fit. They are usually added whenever a new product is set up in the inventory management system. For example, SKUs in Unleashed are used in the Product Code field and can be added manually or uploaded in bulk from an external source.

These are some basic SKU pitfalls to avoid.

1. Keep them simple, and your own

First, SKUs should be simple. Don’t make them too long or complicated to read; they are supposed to be digestible at first glance. This is why they use both numbers and letters, not just numbers, so the information is clear.

Second, if possible, do not copy vendor or manufacturer codes. It will cause confusion in the future. Develop your own inner language.

• Bonus tip: Some experts also recommend against using part numbers or serial numbers in SKUs, as they can be too long to read or may be changed by the manufacturer (or you can change the manufacturer). Of course there are exceptions to this rule – we even used the example of a part number for our A/C Condenser earlier, provided it was consistent and short enough to read quickly.

2. Keep it consistent

As you develop your language, keep in mind that you’ll want to stick with it for a while. To be effective, SKUs need to be consistent with each other so you don’t want to change them in the future.

3. Be wary of certain characters

Characters like 0 and O look very similar in certain fonts, as do lowercase L and uppercase I. Try not to use them unless they are in a clear context. In general, avoid using them alone.

Special characters like / or , @, #, ! and so on should also all be avoided, both for clarity and because they may not format correctly in some software.

Why are SKU Numbers Important?

1. Accurate Inventory Control

Managing inventory management software can be complicated at times. Furthermore, while excess product inventory can lead to reduced profits due to increased operating costs, on the other hand, product inventory shortages can result in a loss in terms of potential business.

In short, stock units help keep inventory records up-to-date, which in turn allows you to maximize profits and achieve business goals.

2. Forecasting of Sales

Having a proper database and record of physical products using unit stock numbers will help you better forecast your sales. In short, you can easily find out which products are selling well, fast, or probably slow. With all this data, it is easy to predict inventory requirements and maintain them accordingly. Then you need to strategically analyze the products. You can then take the required steps to promote the sale.

3. Facilitating Quick Shipment

After placing an order, timely shipping is important. As a result, inventory tracking is a very important step. Therefore, SKUs make it very easy.

They help warehouses quickly find the desired product. In addition, stockists can find the exact product with accuracy. Meanwhile, products that have multiple variants can soon be sorted and stocked based on SKUs. Above all, whenever a specific product is needed, the database can be checked to find out the exact location of the product. As a result, it saves the effort of searching for products in large warehouses and helps to ship orders as quickly as possible.

4. Better Customer Service

Customer service teams and brick-and-mortar sales teams can quickly find products that customers have inquired about.

As a result, SKUs make it easier for customers to repeat orders, find a product, and compare product features. For retailers, they can quickly present their needed products to customers when the SKUs are in place.

5. Earning Greater Profits

Inventory unit numbers can help you maximize your profits. In addition, they will help you to know the products that sell the most. Therefore, you need to take strategic measures to maintain your sales level. Proper product placement can be done on both offline and online platforms to increase customer focus. The SKUs then assist in providing “related product” suggestions when selling. Product designs help increase sales and thus profitability.