SKU or Stock Keeping Unit – Meaning, Benefits, Challenges & Best Practices

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SKU stands for Stock Keeping Unit, which is a unique identifier assigned to each product or item in a company’s inventory. The purpose of a SKU is to provide a numerical or alphanumerical code that can be used to easily track and manage a company’s products, including stock levels, pricing, and sales information.

SKUs are used by retailers, wholesalers, and manufacturers to manage their products, streamline their operations, and improve the accuracy of their inventory management systems.

Difference Between SKU and UPC:

SKU (Stock Keeping Unit) and UPC (Universal Product Code) are both used to identify products in inventory and point-of-sale systems, but they serve different purposes.

A SKU is a unique identifier for a particular product or item that is used by a retailer or manufacturer to track inventory. It can be a combination of letters and numbers that are assigned by the retailer or manufacturer, and it often includes information such as the product’s brand, style, color, size, and other distinguishing features. SKUs are typically internal codes used by a specific company to manage its inventory and track its sales.

A UPC, on the other hand, is a standardized barcode that is used to identify a product in a store. It is a unique 12-digit number that is assigned to a specific product by the GS1 organization, which oversees barcode standards. The UPC is used by retailers to scan products at the point of sale, and it contains information about the product’s manufacturer and the specific product itself.

While both SKUs and UPCs are used to identify products, SKUs are internal codes used by companies to manage their inventory, while UPCs are standardized barcodes used by retailers to scan products at the point of sale.

Benefits of Using SKUs:

Using Stock Keeping Units (SKUs) provides a number of benefits for companies looking to improve their inventory management, sales tracking, customer experience, and supply chain management. By using SKUs, companies can streamline their operations, make more informed decisions, and ensure the efficient and effective management of their products.

There are many benefits to using Stock Keeping Units (SKUs) in a company’s inventory management system, including:

1. Improved Inventory Management:

SKUs make it easier for companies to manage their inventory, as they provide a unique identifier for each product. By tracking stock levels with SKUs, companies can avoid overstocking or understocking, which can result in increased costs or lost sales.

In addition, SKUs can also help companies to monitor sales trends and reorder products as needed, ensuring that they always have the products their customers need in stock.

2. Better Sales Tracking:

With SKUs, companies can track sales data for each product, including the number of units sold, the average selling price, and the sales volume over a given period of time. This information is crucial for companies that want to make informed decisions about product pricing, product promotions, and marketing campaigns.

By using SKUs, companies can quickly and easily access sales data for each product, improving the accuracy and efficiency of their sales tracking systems.

3. Increased Efficiency:

SKUs help to reduce the risk of human error by providing a consistent and standardized way of identifying products. This makes it easier for employees to find the information they need, reducing the time and effort required to manage products and improving overall efficiency.

In addition, by using SKUs to track inventory levels, companies can more easily determine which products are in high demand, allowing them to allocate resources more effectively.

4. Enhanced Customer Experience:

By using SKUs, companies can quickly and easily access information about a product, improving the customer experience and reducing the likelihood of customer frustration or dissatisfaction. For example, if a customer is inquiring about a product, a customer service representative can quickly access the relevant SKU to find information about the product’s availability, pricing, and shipping details.

This can help to ensure that customers receive the information they need quickly and accurately, improving their overall satisfaction with the company.

5. Improved Supply Chain Management:

SKUs can also help companies to better manage their supply chains, reducing the risk of stock shortages or stockouts. For example, if a company uses SKUs to track their inventory levels, they can quickly identify which products are running low, allowing them to reorder before they run out of stock.

This can help to ensure that the company always has the products its customers need in stock, improving its overall supply chain efficiency.

6. Enhanced Data Collection and Analysis:

By tracking sales and inventory data associated with specific SKUs, companies can gain valuable insights into the performance of their products and make informed decisions about future business strategies.

For example, a company might analyze sales data for a particular SKU to determine which products are selling well and which ones are not, allowing it to make data-driven decisions about product promotions and marketing campaigns.

Understanding Stock Keeping Units (SKUs):

Stock Keeping Units, or SKUs, are unique identifiers assigned to each product or item in a company’s inventory. They are used to track and manage a company’s products, including stock levels, pricing, and sales information. Understanding SKUs is important for businesses of all sizes, as they play a critical role in ensuring the efficient and effective management of products.

A SKU is typically composed of a combination of letters and numbers that provide specific information about the product, such as its size, color, or material. For example, a company might assign a SKU of “ABC123” to a particular product, with “ABC” indicating the product type and “123” indicating the specific product variant.

The use of SKUs helps companies to streamline their operations and improve the accuracy of their inventory management systems. By assigning a unique SKU to each product, businesses can track stock levels, monitor sales performance, and manage their supply chains more effectively. This helps to reduce the risk of overstocking or stock shortages, which can result in increased costs or lost sales.

What information does an SKU contain?

The information encoded in a SKU can vary depending on the business and its specific needs. However, some common information that an SKU often contains includes:

Product identifiers:

1. Brand: This indicates the product’s manufacturer or brand name.
2. Product type: This identifies the category of the product (e.g., clothing, electronics, food).
3. Model or style: This specifies the specific version or design of the product.
4. Color: This identifies the color of the product.
5. Size: This indicates the size of the product (e.g., small, medium, large).
6. Material: This specifies the material used to make the product.

Inventory information:

1. Location: This identifies the physical location where the product is stored.
2. Quantity: This indicates the number of units of the product currently in stock.
3. Status: This shows the current status of the product (e.g., active, discontinued, on order).

Other information:

1. Price: This may be included in the SKU, especially for internal SKUs.
2. Vendor: This identifies the supplier of the product.
3. Date: This may indicate the date the product was manufactured or added to inventory.
4. Batch or lot number: This helps track specific batches or lots of products for quality control purposes.

Important points to note:

• The specific information encoded in an SKU is determined by the business and its individual needs.
• Businesses can customize their SKU structure to include any relevant information.
• SKUs are often designed to be easily readable and scannable for efficient inventory management.
• Not all SKUs will contain all of the information listed above.

Overall, the information contained in an SKU plays a crucial role in enabling businesses to accurately track and manage their inventory, leading to improved efficiency, reduced errors, and better decision-making.

How SKUs Work:

SKUs are the backbone of efficient inventory management. Here’s how they work:

1. Assigning SKUs:

• Businesses create unique alphanumeric codes for each product, often incorporating information like brand, type, size, color, etc.
• These codes become the product’s identifier within the business, allowing for easy tracking and differentiation.

2. Encoding Information:

• The SKU can be encoded in various formats, including barcodes and QR codes, making it easily scannable by barcode scanners.
• This encoded information allows for quick and accurate retrieval of product details, streamlining operations.

3. Tracking Inventory:

• As products are received, sold, or transferred, their SKUs are scanned, updating the inventory system in real-time.
• This provides complete visibility into stock levels, preventing overstocking or stockouts.

4. Order Fulfillment:

• When an order is placed, the associated SKUs are identified and picked from the warehouse.
• This ensures the correct items are picked and shipped, minimizing errors and delays.

5. Data Analysis:

• Analyzing SKU data allows businesses to track product performance, identify trends, and forecast future demand.
• This information helps businesses make informed decisions about pricing, promotions, and inventory management.

Here’s a breakdown of the workflow:

1. Product creation: A new product is created and assigned a unique SKU based on its specifications.
2. Inventory receiving: The product is received into the warehouse, and its SKU is scanned, updating the inventory system.
3. Order placement: A customer places an order for the product, specifying the SKU.
4. Order picking: The order picker uses the SKU to locate and pick the correct product from the warehouse.
5. Order fulfillment: The picked product is packaged and shipped to the customer.
6. Inventory update: The product’s SKU is scanned again to update the inventory system, reflecting its sold status.

SKUs are essential tools for efficient inventory management, helping businesses optimize their operations, improve customer satisfaction, and achieve their goals.

How to create effective SKUs:

Effective SKUs are crucial for efficient inventory management, ensuring accurate tracking, streamlined operations, and informed decision-making. Here’s how to create effective SKUs for your business:

1. Define your needs:

• Identify the information you need to track: Consider brand, type, size, color, material, vendor, etc.
• Determine the level of detail: Decide how granular your SKUs need to be based on your product variations and inventory management needs.

2. Choose a structure:

• Sequential: Simple and easy to manage, but may not provide enough information.
• Hierarchical: More complex, but allows for encoding various product attributes.
• Hybrid: Combines sequential and hierarchical elements for specific needs.

3. Use consistent rules:

• Length: Keep SKUs short and memorable, ideally between 8-12 characters.
• Characters: Avoid using special characters or zero to prevent scanning errors.
• Order: Establish a consistent order for encoding information (e.g., brand-type-size-color).

4. Consider legibility and scannability:

• Use clear and easily readable fonts for physical labels.
• Ensure barcode and QR code formats are compatible with your scanning equipment.

5. Document your system:

• Create a clear and concise document explaining your SKU structure and encoding rules.
• Share this document with all employees involved in inventory management.

6. Review and update regularly:

• As your product offerings and inventory management needs evolve, review your SKUs and update them as necessary.
• Maintain consistency and avoid making frequent changes to minimize confusion and errors.

Here are some additional tips for creating effective SKUs:

1. Start with the most important information first.
2. Use a consistent naming convention for similar products.
3. Consider future needs and leave room for expansion.
4. Test your SKUs to ensure they are easy to use and understand.
5. Seek input from employees involved in inventory management.

By following these guidelines, you can create effective SKUs that will optimize your inventory management processes and contribute to your business success.

Challenges of using SKUs:

There are a few challenges associated with using SKUs. These include:

1. Difficulty in Generating Unique SKUs:

Generating unique SKUs for each product can be challenging, especially for companies with a large number of products. To overcome this challenge, companies should establish a consistent and logical SKU naming convention that ensures each SKU is unique and easy to understand.

This convention should take into account the company’s product range, product categories, and any other relevant information.

2. Keeping SKU Information Up-to-Date:

Maintaining accurate and up-to-date information for each SKU is crucial for effective product tracking and management. To overcome this challenge, companies should establish a regular review and update process for SKU information.

This process should include updating product information, such as product descriptions, prices, and images, when products change, are discontinued, or are replaced with new versions.

3. Human Error:

Human error can result in incorrect information being associated with SKUs, leading to incorrect inventory levels, sales data, and other product information. To overcome this challenge, companies should provide adequate training to employees on the importance and benefits of using SKUs, as well as the correct procedures for using them.

In addition, companies should consider automating SKU management to reduce the risk of human error.

4. Integrating with Other Systems:

Integrating SKU information with other systems, such as barcode systems or inventory management software, can be challenging. To overcome this challenge, companies should ensure that systems are compatible and that SKU information is accurately transferred between systems.

This can be achieved by selecting software solutions that are specifically designed for SKU management and have integrated capabilities with other systems.

5. Cost of Implementation:

Implementing a SKU management system can be expensive, especially for companies that need to purchase new software or hardware. To overcome this challenge, companies should carefully evaluate their needs and budget, and choose a solution that is cost-effective and meets their requirements.

In addition, companies should consider the long-term benefits of using SKUs, such as improved accuracy, efficiency, and profitability, when making their decision.

6. Inadequate Employee Training:

Inadequate employee training on the use of SKUs can result in incorrect usage, leading to inaccuracies in product tracking and management. To overcome this challenge, companies should provide adequate training to employees on the importance and benefits of using SKUs, as well as the correct procedures for using them.

This can include hands-on training, written materials, and ongoing support to ensure that employees have the knowledge and skills they need to effectively use SKUs.

7. Resistance to Change:

Change can be difficult for employees, and introducing a new system such as SKU management can be met with resistance. To overcome this challenge, companies should communicate the benefits of using SKUs and provide adequate training to employees.

In addition, companies should involve employees in the implementation process, listen to their feedback, and address any concerns they may have. This can help to overcome resistance and build support for the use of SKUs.

SKU Management Best Practices:

Here are some best practices for SKU management:

1. Implement a Consistent SKU Naming Convention:

Having a consistent SKU naming convention helps employees understand and find the information they need. This can be done by using a combination of letters and numbers to identify specific products or including information about the product in the SKU name (e.g. product type, manufacturer, size). For example, a company may use the SKU format “T-SHIRT-RED-S” for a red t-shirt in size small.

2. Regularly Review and Update SKUs:

Over time, products can change, be discontinued, or be replaced with new versions. It is important to regularly review and update SKUs to ensure the information associated with each SKU remains accurate and up-to-date. For example, if a product is discontinued, its SKU should be deactivated to prevent confusion or errors in inventory tracking.

3. Store SKU Information in a Centralized Location:

Keeping SKU information in a centralized location, such as a database or spreadsheet, makes it easier for employees to access the information they need and helps to ensure that the information is consistent and up-to-date across the organization.

4. Train Employees on the Importance of SKUs:

Educating employees about the importance of SKUs and how they should be used is crucial. This can help ensure that employees understand the benefits of using SKUs and how they can improve the efficiency and accuracy of product tracking and management.

5. Consider Automating SKU Management:

Automating SKU management can reduce the risk of human error and improve the accuracy and efficiency of product tracking. This can be done through the use of barcode systems or software solutions. For example, a barcode system can automatically scan a product’s SKU and update inventory levels, while software solutions can automate the process of tracking and updating SKU information.

Choosing the Right Software for Managing SKUs:

Many software solutions can help you manage your SKUs effectively. Choosing the right one depends on your specific needs and budget. Here are some popular options to consider:

1. Cloud-based inventory management software:

• Pros: Easy to access from anywhere, affordable, scalable, automatic updates.
• Cons: May require internet connection, limited customization options.
• Examples: Zoho Inventory, Fishbowl Inventory, Cin7, Skubana.

2. On-premise inventory management software:

• Pros: More control over data, customizable, no internet dependence.
• Cons: Higher initial cost, requires IT infrastructure maintenance, not as scalable.
• Examples: Microsoft Dynamics 365 Business Central, SAP Business One, Sage 100cloud.

3. Open-source inventory management software:

• Pros: Free to use, customizable, large community support.
• Cons: Requires technical expertise to install and maintain, limited support options.
• Examples: Odoo, Openbravo, Dolibarr.

4. E-commerce specific inventory management software:

• Pros: Integrates seamlessly with e-commerce platforms, automates order fulfillment.
• Cons: May not have advanced features of other software, may be more expensive.
• Examples: Shopify Inventory, Sellbrite, Skubana, Zoho Inventory.

5. Mobile inventory management apps:

• Pros: Convenient for managing inventory on the go, barcode scanning capabilities.
• Cons: Limited features compared to desktop software, may require additional hardware.
• Examples: Stocky, Sortly, Inventory Now, InFlow Inventory.

Here are some additional factors to consider when choosing software for managing SKUs:

1. Number of SKUs: Different software caters to various sizes of inventories.
2. Features: Choose software with features relevant to your needs, such as barcode scanning, reporting, and multi-location support.
3. Budget: Consider the upfront cost and ongoing subscription fees.
4. Ease of use: Choose software with a user-friendly interface and intuitive navigation.
5. Scalability: Ensure the software can grow with your business needs.
6. Security: Choose software with robust security features to protect your data.
7. Customer support: Opt for software with responsive and helpful customer support.

Research and compare different software options to find the best fit for your business. Consider free trials or demos to test the software before making a decision.

By investing in the right software, you can significantly improve your SKU management and achieve greater efficiency and profitability in your business.

Conclusion:

The benefits of using SKUs include improved accuracy in product tracking, enhanced inventory management, and increased efficiency in sales and distribution processes. By implementing best practices for SKU management, including using unique and easily recognizable SKUs, keeping SKU information up-to-date, and integrating SKU information with other systems, companies can overcome the challenges of using SKUs and realize the full potential of this important tool.

Ultimately, the use of SKUs can help companies to improve their operations, increase their profitability, and provide better customer service.

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