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Find out what SKU means and how you can implement an SKU system to optimize your inventory management. Here’s why your business needs it.

It’s time to understand Stock Keeping Units (SKUs) and switch to a barcode system for managing your inventory. A SKU inventory strategy can seem difficult or overwhelming to implement, but it’s essential to save time and eliminate the potential for human error that comes with physically counting inventory.

A SKU barcode with numbers under the lines.

A SKU can be the corresponding number and/or line that signifies exactly what a product is, including critical details. Image source: author

Keep reading to learn all about SKUs, how they power your inventory management software, and why they’ll help improve your operational efficiency.

Overview: What is a Stock Keeping Unit?

A SKU is most often represented in the form of a scannable barcode which corresponds to a number generally consisting of around eight digits. SKU numbers and their corresponding barcodes are linked to your main product profile, representing price, location information, and essential product details (size, color, manufacturer, etc.).

SKU numbers can be applied to all types of inventory. They are most often used to highlight tangible consumer products, but SKUs can also represent intangible products, such as services, warranties, and hourly labor.

SKU vs UPC: What’s the difference?

Who knew inventory management required so much alphabet soup? You’ve just gotten familiar with SKUs, and now we’re throwing another acronym at you. But it’s important to understand the difference between a SKU and its often misunderstood counterpart, UPC.

UPC stands for Universal Product Code and just as it sounds, it is a mechanism for manufacturers to assign a unique code that is shared among their retailers and sellers. A UPC search can cross different retail businesses to find a single product. SKUs, on the other hand, are usually unique to a retailer, meaning the same product will have a different SKU at different retailers.

The reason for having both codes (and others) is to give organizational benefits to different stakeholders, such as retailers, manufacturers, resellers, etc.

What are SKUs used for?

SKUs are used to enhance all types of inventory management strategies. From a 10,000 foot view, SKUs are simply data-enabled codes that contain essential product information for retailers to immediately understand the product.

A SKU number on a barcode label for a t-shirt.

SKUs will differentiate between obviously unique products and seemingly identical products. Image source: author

Retail stores, catalogs, e-merchants, e-commerce consultants, warehouse managers, and fulfillment organizations all use SKUs to process payment, checkout, organize, and move the right products from A to B.

Scannable SKUs integrate with point-of-sale (POS) software and e-commerce solutions to make order fulfillment and inventory a breeze. Each time a product is scanned for purchase, the POS automatically adjusts the inventory count for all products with the same SKU.

SKUs also work with inventory control systems to record relevant purchase information, such as final sale price and sale date.

Here are three SKU use cases to further emphasize the importance of these seemingly simple codes.

1. Improve inventory tracking

SKUs are an essential part of barcode inventory systems. SKUs primarily allow retailers to identify and track products, including total inventory count, maintain accurate inventory turnover ratios, and better understand the speed and direction of inventory flow.

Retailers can use inventory management software to schedule automatic actions whenever the total count of a SKU falls below a set threshold. These actions include sending a new product order to the manufacturer or analyzing stock levels at other stores to see if they have a surplus.

SKUs and inventory systems also do the opposite by stopping automated replenishments if there is a surplus of the product due to a previous over-order or lack of expected sales.

2. Personalize product recommendations

Another increasingly valuable benefit of SKUs is the ability to personalize product recommendations.

These online recommendations most often appear in emails and display advertisements that follow you around the web. These personalized recommendations increase the likelihood of purchase by engaging consumers with the exact products they viewed on your site or similar products to those they have already purchased.

SKUs make this possible by containing all relevant information about viewed and recommended products. For example, you already know that the shoes you are looking at online correspond to a unique SKU. This SKU also tells the online merchant’s web platform everything it needs to identify similar shoes, products of the same brand, products of the same material or color, etc.

3. Forecast future sales

Forecasting is a critical capability that successful retailers need to master, and SKUs are the foundation on which forecasting happens.

Retailers, e-merchants, and manufacturers all rely on tracking weekly, monthly, and yearly changes in sales volume using SKUs. It therefore makes sense that these same SKUs are also used to predict future sales for a period ahead.

This type of forecast is especially useful for successfully browsing highly seasonal products, such as vacation items, winter clothing, summer clothing, etc. Your SKU-based forecasts help you assign the right lead time to order seasonal products to maximize your resource allocation.

How a SKU works

SKUs basically work as product identifiers and they also differentiate one product from another. SKUs are essentially codes that record and help you and your inventory system identify critical product information.

Suppose you need to create your own SKUs for your cookware store, starting with your cutlery offerings. You would do A to mean cutlery, with A1 being forks, A2 being spoons, A3 being knives, and so on. You can then use B to denote the material of the product, where B1 is stainless steel, B2 is silver, B3 is wood, etc. You can then include numbers, such as 001, 002, 003, etc., to indicate the particular series of cutlery so that someone can easily purchase a complete set of the same series.

So in this particular case, A3B2004 would be a silver knife in the same series as a spoon with SKU A2B2004.

You can then extrapolate that so that the SKU of a wooden plate is C1B3031, where C stands for crockery, 1 stands for plates, B3 always represents the material (wood in this case) and 031 is the series that this plate comes from .

SKUs are more powerful than they seem

By now it should be clear that SKUs are an incredibly powerful and essential component for successful inventory management. There are some technical features that you may need to overcome, and the codes may seem like a blacksmithing language at first glance, but it is essential that you implement an SKU system. Personalize it and make it meaningful for your business, but make sure you do.

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