In addition to identifying products, stock keeping units (SKUs) have many different uses and play a key role in a well-designed inventory management system.
What Is a Stock Keeping Unit?
A stock keeping unit (SKU) is a unique alphanumeric code assigned to items that defines them and allows them to be easily identifiable at the inventory level For example, a clothing retailer may use SKUs to designate style, size, and color of a shirt.
An electronics store will likely have sections for televisions, audio equipment, home appliances, computers, smartphones, along with other various electronics. They might create their SKUs in order to quickly identify that a product is part of their audio equipment line of products. Other SKUs identify computer products, and so on.
SKUs easily allow retailers to track their stock and measure sales.
Stock keeping units are unique to each retailer. In this way they differ from universal product codes (UPCs), which as their name implies, are the same for everyone.
What is the difference between a SKU and barcode?
SKUs are internal product codes used by companies for inventory management in product fulfillment centers and warehouses, while barcodes are standardized codes used universally for identifying products in various systems, including point-of-sale systems and global supply chains.
You can check out our free SKU generator and start creating your own SKUs today.
How Do Stock Keeping Units Work?
Let’s continue with the example of an electronics retail store to illustrate how SKUs work. A retailer needs to come up with an inventory procedure for their computer department.
They might use the letter C to identify all products for the computer department. From there, they might use C1 for desktop computers C2 for laptops, and C3 for tablets.
Then they might want to break it down by which processor chip manufacturer the systems use. P1 could be for Intel and P2 for AMD.
Next they could break down products by how much RAM they come with: R08 for 8 gigabytes, R16 for 16 gigabytes, and R32 for 32 gigabytes.
In this case, the SKU C1P2R16 would identify a desktop computer (C1) running on an AMD processor (P2) with 16 GB of RAM storage (R16).
The SKU C2P1R32 would identify a laptop (C2) running on an Intel processor (P1) with 32 GB of RAM (R32).
Obviously, there is a lot more to computer components. There are tons of different AMD and Intel processors today that could be broken down further depending on which ones the retailer carries. RAM chips are not just categorized by size, but by speed as well. However, for our purposes you can see the beginnings of how a SKU inventory system is created and broken down.
SKUs then get entered into the retailer’s inventory management system, which in turn is integrated into their sales system.
Check out our best practices for creating stock keeping units for more information and examples for creating your own SKUs.
How Are SKUs Used?
Stock Keeping Units can be used for more than just tracking inventory levels. With a good SKU system in place, you can use the information to better understand key metrics within your business.
Inventory Management
The most obvious use of SKUs is for inventory management. Business owners can track inventory levels of individual products which can then in turn be used for timing inventory resupply orders.
Analysis
SKUs allow business owners to quickly collect and organize information to analyze things like product popularity, seasonal cycles of products, and sales trends. This data helps with inventory management as they can stock inventory beforehand when they know that busy cycles are coming up for individual or categories of products.
Product Recommendations
Companies, especially online retailers, are using SKUs to improve the customer experience in shopping online. Many eCommerce stores display product suggestions as you are shopping. These suggestions are often using the SKUs of products you have viewed or are viewing to show similar and related products that you might be interested in.
Wrapping Up
Stock keeping units are a vital part of any successful business that is selling physical products. It allows them to effectively track and manage inventory, analyze trends, and can be used to increase sales through product recommendations.
