Your inventory is one of your company's most valuable assets. Second only to its invaluable human labor.
And when you have a tidy SKU system behind your inventory, it gets even more valuable.
That’s because you reduce your sitting inventory. You eliminate pesky backorders (backorder definition). You sharpen up your purchase orders. In short, you smooth your entire inventory management process.
Here’s the meaning of SKU, how they’re constructed, and the benefits of using them.
SKU Meaning: What Does SKU Mean?
A SKU number is a unique code assigned internally to a product. It helps track it as it moves through the inventory pipeline. SKUs enable organizations to search and identify stock from inventory counts. As well as cycle inventory, invoices, and purchase orders. SKUs are widely used in the field of inventory control and inventory management.
SKU numbers are typically between 8 and 12 numbers and every single character in them means something. They’re also not universal. They are only used internally and each organization that uses SKUs is responsible for their architecture.
Here’s what a SKU number looks like:
SKU numbers are often located above barcodes, as in the image above.
What Does SKU Stand for?: A SKU Definition
The SKU acronym stands for “Stock Keeping Unit.” SKUs allow businesses to accurately track inventory. That's because each product is associated with a unique SKU code.
What Is SKU Number? Parts of SKU Number
SKU numbers are made of three distinct parts. The top-level identifier, the middle numbers, and a sequential number at the end.
The top-level identifier of a SKU number is the first two or three alphanumeric characters. These represent the broadest possible categorization level. They could represent a department within a store, a category of goods, or a supplier. It provides the most basic information about the product. From there, the numbers begin to represent more specific information.
The middle two or three numbers represent the product’s unique features. This is the mid-level identifier. It’s typically item type, gender, brand, color, size, or some other subcategory.
And finally the last two to three numbers are sequence identifiers. Let’s say we’re adding SKUs to large blue teddy bears. The first one large blue teddy bear would end with a sequence modifier of 001. The next 002, and so on. That way the SKU number also communicates the order in which the inventory was acquired and processed. Along with the total number of inventory items present.
SKU Number Examples
Let’s take a look at building an example SKU number.
Consider a coffee roaster.
Each SKU number in the far right column is a collection of the three different identifiers. This is the most basic SKU number structure out there.
It can get a touch more complicated if you’re using different identifiers.
An identifier like supplier, for example:
Other SKU number identifiers can include store or location or department. Or really anything that will make it easier to categorize your products.
SKU Number vs UPC Codes
Unique numeric identifiers for individual products?
“Wait a minute, that’s a UPC code. Nice try, BlueCart! You almost had me.”
Not so fast! There’s a difference between a SKU number and a UPC code. They’re similar, you’re right, but they’re used for different purposes.
The primary difference is internal and external use. SKUs are only used internally for inventory management purposes. They’re not used externally (with customers) and scanned at checkout like a UPC is.
SKUs and UPCs should complement each other and not be identical. The SKU should identify the product traits. And the UPC should identify the manufacturer, in general.
Why Use SKU Numbers?
Using SKU numbers is an inventory management technique that allows businesses to handle a multitude of things that would otherwise be much more difficult.
- Help businesses track inventory. From a producer’s end, finished goods inventory can be tracked for accurate counts. And from a retailer’s end, inventory on-hand ready for sale is readily available when SKU numbers are scanned upon arrival. And updated in real time via perpetual inventory.
- Make inventory counts easier. Taking physical inventory becomes much easier when every unique item and product variation has a unique SKU number associated with it. That’s because inventory categorized by SKU is better organized and more easily identified.
- Enable companies to identify shrinkage. Inventory shrinkage affects everyone’s bottom line, often quite substantially. But its effects can be diminished. When inventory is neatly categorized by SKU, areas of the pipeline with lost, damaged, and obsolete products can be isolated. And once you’ve pinpointed the weak spots in your inventory management, you can set about fixing them. You can also set about instituting new inventory management methods like ABC inventory, JIT inventory, dropshipping, or consignment inventory, or product kitting based on your findings. Some methods make work better or worse based on how your supply chain and pipeline operate. Overseeing your SKUs is one way to find out.
- Assist in setting accurate reorder points. Using SKU numbers introduces a granularity into your inventory management that makes gauging stock levels easier. Every product variation will have its own SKU and accurate inventory counts. That makes setting different reorder points for different types of inventory easier. And that, in turn, allows you to get inventory when you need it but also avoid ending up with excess inventory when you don’t.
- Aid in calculating—and boosting—revenue and profits. Using SKUs provides companies with detailed insight into their inventory levels and movement. Using that data, companies know which products have the highest turnover ratio. Down to the very minute product variations. That means inventory managers can leverage that data when making purchasing decisions. Maybe bulk shipping is a better option based on your sell through rate. And companies can lean into focusing on product variations with the most demand.
- Related products. If a product is out of stock, or if you’d like to recommend a similar product to someone, you can use SKUs. By changing the mid-level identifier of a SKU, you’ll get similar products but with slight variations. Blue instead of green, for example. Small instead of large. Deluxe instead of standard. Use the natural and logical categorization of SKU numbers in the interest of discoverability on your eCommerce platform or digital storefront.
SKU the Results in Your Favor
Useful SKU numbers are the result of organizations that put time in to create meaningful SKU architecture and organization. The more logical and informative your SKU numbers are, the easier it’ll be to leverage them for smoother inventory management.
Remember, SKUs help track specific products and they’re not universal. It’s up to each business to uniquely integrate them into their business. They’re a tool, so they’re only as good as the person using them.
Put some effort into the creation of your SKU system up front and you’ll be sitting pretty down the line.