What is an SKU and How does it Impact your Inventory?

Struggling to stay afloat in a sea of inventory or losing sales due to stockouts? In the cutthroat world of retail e-commerce, these are common pain points. Say a customer wanted to buy a specific product, but you can’t find it in your warehouse. Or worse, you think you have it, but it’s actually out of stock. These inventory mishaps can be avoided with a simple yet powerful approach to product identification: the Stock Keeping Unit (SKU). Whether you’re a small online boutique or large global corporation, knowing what you have in stock, where it is, and how quickly it’s moving is crucial for success. Strong inventory visibility can help foster topline growth, from smooth business scaling to happier customers. 

In this blog, we’ll explore the ins and outs of SKUs. This includes what they are, why they’re important, the benefits they bring to inventory management, and how you can implement them effectively to optimize your inventory.

What is an SKU?

An SKU, or Stock Keeping Unit, is a unique code composed of letters and numbers, assigned to each distinct product you sell. So, what does SKU mean in practice? It essentially acts as an internal identification number that allows you to identify, track, and differentiate between products within your inventory. 

Each SKU is created by the retailer, specifically for your own internal use. A detailed way of categorizing and managing your products, SKUs are made based on attributes like size, color, style, brand, and any other variations that might exist. For instance, an electronics store might use SKUs like LAP-HP-13BLK to refer to a 13-inch HP laptop in black.

Why are SKUs Important?

As the baseline for effective inventory management, SKUs enable streamlined operations and boost profitability. Consider a warehouse stocking an assortment of bags in various styles, colors, materials, and sizes. Without SKUs, finding a medium, red leather shoulder bag among other near-identical red bags can become a time-consuming process. Tracking inventory levels for each variation would be almost impossible, hindering accurate sales forecasting and potentially leading to stockouts or overstocking.

With a well-structured SKU system, each bag variation receives a unique identifier (e.g., SB-RED-M-LTH). This allows warehouse staff to quickly locate items, maintains optimal inventory levels, drives accurate order fulfillment, and provides management with crucial data on product performance. This seemingly simple improvement can have a ripple effect throughout end-to-end warehouse operations, driving efficiency and accuracy in order fulfillment.

Benefits of SKUs

Now that we’ve understood the SKU meaning and the important role it plays in inventory management, let’s deep dive into key advantages a well-designed SKU system can bring to your business.

Accurate Inventory Tracking

SKUs allow you to track inventory levels for each specific product variation. You know exactly how many black trousers in size small you have in stock, preventing overselling and stockouts. By optimizing inventory levels, you can make sure your best-selling products are always available, maximizing sales opportunities.

Efficient Order and Stock Management

SKUs streamline order fulfillment and stock replenishment, leading to greater efficiency and accuracy. Their clear product identification minimizes picking and packing errors, ensuring customers receive the correct items. Simultaneously, SKUs provide a clear overview of product performance, simplifying stock replenishment by highlighting best-sellers and identifying items that need restocking.

Streamlined Warehouse Operations

SKUs simplify various business processes, from order fulfillment to restocking. They reduce errors and improve efficiency across the board. SKUs can also guide warehouse layout and organization. Products with similar SKUs can be stored together for easier picking and packing.

Data-Driven Decision Making

By analyzing sales data associated with each SKU, you can identify your best-selling products, slow-moving items, and seasonal trends. This information allows brands to forecast future demand more precisely, making way for informed purchasing decisions. It also provides valuable insights into your business performance, enabling you to make data-driven decisions about pricing, marketing, and product development.

How to Create an SKU

Ensure useful SKU creation with a systematic approach. The following steps outline how to create your own unique SKUs:

• Determine key attributes: Pinpoint the most important product characteristics, such as type, color, size, material, or style. Use abbreviations to keep SKUs concise.
• Maintain consistent formatting: Establish consistency by separating individual attributes with hyphens or underscores.  
• Aim for simplicity: Make sure your SKUs are readable. Avoid overly complex or cryptic codes. SKUs should be easy to understand and remember.
• Keep it unique: To prevent confusion and errors, every product needs a unique SKU.  Don’t reuse SKUs for different items or variations.
• Establish a system: Develop and enforce a standardized system for assigning and entering SKUs into your inventory management software for consistency.

SKU vs. Other Product Identifiers

Outside of SKUs, some businesses may choose to organize and identify products in other ways. Some common product identifiers include:

• UPC (Universal Product Code): These are standardized barcodes used for product identification at the point of sale. They are assigned by the manufacturer and are unique to each product. Usually only composed of numbers, they differ from retailer-created, alphanumeric SKUs.
• MPN (Manufacturer Part Number): These are codes used and assigned by the manufacturer to identify a specific product. It’s useful for communicating with the manufacturer but is not typically used for inventory management within a retail setting. 

SKU Implementation in Business

SKU implementation is crucial for modern businesses. Primarily integrated with inventory management software, SKUs enable real-time stock tracking and automated alerts, preventing costly stockouts. For example, a clothing retailer’s system could automatically reorder “TSH-BL-M” (blue T-shirt in size medium) when stock falls below a threshold, avoiding stockouts and lost sales — an issue driving negative customer experiences and costing retailers almost $1 trillion annually, according to Harvard Business Review.  

E-commerce platforms also leverage SKUs for streamlined order processing. Displaying SKUs on product pages allows customers and staff to quickly identify the exact item being purchased, minimizing errors and returns. By guaranteeing the right product falls into the right hands, brands can improve customer satisfaction and reduce costly returns. Warehouse management systems (WMS) also leverage SKUs to pinpoint product locations, optimizing picking and packing. This is particularly crucial for large warehouses.

Lastly, SKUs play a critical role at the point of sale (POS). By linking barcodes to SKUs, POS systems can quickly and accurately record sales transactions, automatically updating inventory levels in real time. This not only speeds up checkout times for customers but also provides valuable sales data (e.g., tracking cosmetic sales during specific promotions like Black Friday) that can be analyzed to identify trends, best-selling products, and areas for improvement. To further optimize your product portfolio, consider SKU rationalization to boost business performance.

Best Practices for Using SKUs

SKUs require proactive management to function successfully. To promote optimal operations, here are some best practices for maintaining a healthy inventory and SKU system:

1. Regularly Review and Update

Regularly review and update your SKUs to reflect any changes, including new products, discontinued items, or variations in existing products. For consistent implementation, conduct thorough training. Everyone involved in handling inventory—from warehouse staff to sales teams—should understand SKU structure and usage. This will also minimize errors in the long run.

2. Integrate with Other Systems

SKUs become even more powerful when integrated with other business platforms. Connecting your SKU system with e-commerce platforms and warehouse management systems creates a unified data flow. This integration provides a holistic view of your business, enabling seamless data sharing and automation. For example, sales data from your e-commerce platform can automatically update inventory levels in your WMS, triggered by SKU information.

3. Monitor Performance

Regularly monitor key metrics to ensure its effectiveness. Track stockouts, overstocking, and sales by SKU. Analyzing this data reveals valuable insights. For instance, you might discover slow-moving items that are tying up capital or identify popular products that frequently run out of stock. Use these insights to refine your inventory strategy, adjust ordering patterns, and optimize stock levels.

Conclusion

While setting up an SKU system might seem like a daunting task initially, the long-term benefits far outweigh the initial effort. After diving into the SKU meaning, it’s clear that they’re essential for any business that manages inventory. They give you greater control over your inventory, improve operational efficiency, and enhance customer service for a healthier bottom line. With support from Anchanto’s Inventory Management solution, businesses can ensure the effective implementation of SKUs.

Get in touch with us today to unlock smarter, leaner inventory management.