What Is An SKU? All You Need To About SKU Numbers

what is a sku
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SKUs are used to track inventory levels by retailers, catalogs, e-commerce suppliers, service providers, warehouses, and product fulfillment centers. Managers can easily detect which products need to be restocked thanks to scannable SKUs and a POS system. When a customer purchases an item at the point-of-sale (POS), the SKU is scanned, and the POS system removes the item from inventory while also collecting other data such as the selling price.

What is an SKU?

An SKU (stock keeping unit) is a one-of-a-kind number combination used by merchants to identify and monitor merchandise. It is typically 8 characters long and composed of letters and digits. Retailers assign distinct SKU numbers to various products based on characteristics such as price, manufacturer, color, style, kind, and size.

SKUs are unique to a company and can be tailored to match the demands of vendors and customers. They aid retailers in tracking merchandise from source to customer.

You probably have an SKU architecture in place — or are planning to add one — whether you’re a retail veteran or a brand new business owner, have a big inventory or small stock, or run a brick-and-mortar store or an online marketplace.

What Is the Importance of SKUs?

SKUs allow customers to compare the features of similar items. When a client buys a specific DVD, for example, online retailers may offer comparable movies purchased by other customers based on SKU information. This strategy may drive the customer to make future purchases, increasing a company’s income.

SKUs also enable the collection of sales data. Based on the scanned SKUs and POS data, a store may identify which items are selling well and which are not.

What Characteristics Define SKU Codes?

  • It identifies the smallest unit of sale. In a footwear company, for example, one of its SKU numbers could be a pair of white size 41 sports shoes of a specific style (rather than each individual shoe because they are not sold separately).
  • An SKU is a one-of-a-kind code made up of letters and integers. Normally, it is possible to deduce which product is being referred to from this data. Those generated automatically by computerized systems, on the other hand, are more difficult to guess. A very basic SKU for a pair of white size 41 sneakers model XYZ may be DEPOR-XYZ-BLN-41, like in the previous example.
  • The company’s ERP generates SKU codes, whereas the WMS interfaces to the ERP and maintains the SKU codes in all warehouse processes.
  • The factors used to construct an SKU are decided by the properties of the product being saved, and each combination results in a unique SKU code. The white size 41 sneakers will have a certain SKU, however the size 39 sneakers will have a separate Stock Keeping Unit.
  • The purpose of an SKU is to record the attributes of each product stored in a specified location. The Stock Keeping Unit code, which reflects the smallest stored unit in detail, allows for improved accuracy in the warehouse’s available inventory and better traceability of product references at various supply chain stages.
  • Because they are identical, several units of the same SKU will have the same SKU number.
  • SKUs can also be used to refer to services. However, in this case, we will concentrate on their utility in warehouse inventory management.

How to Generate SKU Numbers

SKUs provide information about sales and inventory movements that is useful for your vendor and customer relationships. 

However, before you can access that data, you must first create your product’s SKU numbers, also known as your SKU architecture.

The most convenient way to generate SKU numbers is through your inventory management and POS system. 

Online SKU generators like Primaseller or TradeGecko can also assist with the process. SKUs can also be created by hand on an as-needed basis, though this isn’t usually recommended, particularly for businesses with big inventory.

Let’s look at the anatomy of an SKU number now.

The first portion of an SKU is usually the most general feature, such as the department, product category, or supplier. This is translated to the top two or three alphabetic qualities.

The next characters denote product-specific characteristics such as color, size, brand, or other subcategories. 

Finally, the last two to three attributes serve as a sequence identifier, allowing your SKUs to inform you how many products you have and in what order they were purchased and processed.

Examples of SKU Number Applications

To begin, as you are aware, implementing a robust SKU system can assist you in tracking your inventory more efficiently.

This means you’ll always know where your stock is and how much you have.

Inventory management

The key to best practice inventory management is that the more you know about your stock levels and product movements, the better positioned you will be to make data-driven purchase decisions in the future.

As they represent a distinct item containing its specific variants, such as season, size, and color, SKUs assist you to understand what your customers desire, where you can minimize costs, and where you can focus your money.

Maintaining a robust SKU system is critical for inventory optimization because it allows you to identify slow-moving products and cut the carrying costs associated with overstocking these items.

Reduce Theft

Missing things are often ignored in a warehouse with potentially thousands of products.

Inventory shrinkage is a problem that many business owners face.

However, the capacity to narrow down products to their precise SKUs makes it far more difficult for items to go missing, reducing the possibility of theft.

Determine reorder points

With SKU numbers, you may define reorder points for each product and its variants, ensuring that you are always aware of when you need to reorder stock.

Monitoring which items, and which varieties of those products, are selling the best will help you decide what to spend more on and what to consider terminating.

The ability to define individual reorder points assures that you will never run out of stock or incur excessive fees for surplus stock.

Suggestions for SKU Naming Conventions

  • Keep your character count between 8 and 12 characters.
  • Begin the SKU with a letter, such as the supplier’s or brand’s first letter.
  • Never use the number zero or special characters such as!, @, or &.
  • Create a one-of-a-kind, simple format.
  • To benefit your retail sales force, start with the most searched-for product features.

Stock-keeping Units vs. Universal Product Codes

Because SKUs are created internally by firms to maintain inventory, SKUs for identical products differ between enterprises. Different SKUs enable retailers to create advertising campaigns free of influence from other vendors.

For example, if a company uses the SKU to market a certain discounted refrigerator, buyers cannot readily find the identical refrigerator at other sellers based just on the SKU. This prevents rivals from matching advertised prices and stealing clients. In contrast, universal product codes (UPCs) are the same regardless of which company sells the things.

SKU vs Barcode

A barcode is a series of black lines scanned by businesses while completing a customer’s purchase. The term barcode is frequently used interchangeably with UPC, implying that the two are equivalent. 

Unlike SKU numbers, which are specific to a company or seller, barcodes are allocated to all similar products, regardless of where they are sold. SKUs are also associated with barcodes.

How to Grow Your Retail Business Using SKUs

#1. Maintain precise inventory records

SKUs define product characteristics, making them useful tools for tracking the overall health of your inventory—specifically, availability. 

You may determine when to order new products by using your SKU data to monitor product statuses. This is known as a retailer’s reorder point.

Accuracy leads to efficiency and productivity. When you can manage inventory in real time, you gain a greater understanding of your company’s changing demands.

#2. Estimated demand and sales

Accurate inventory counts also imply more accurate sales and demand predictions. 

As a result, answering queries such, “How much staff do I need on the shop floor during a specific season?” becomes easy.

How much of each product should I stock?

How frequently should I replenish specific products?

In what seasons can my cash flow cover my payroll?

Keeping an eye on these moving aspects of your retail store allows you to position yourself as a trustworthy merchant to your customers and merchants.

If your SKU data reveals low-selling stock, don’t get rid of it right away. Some buyers may still buy those items, therefore reduce your inventory instead.

A Walmart project named Project Impact in 2008 is a perfect illustration of what not to do: the corporation kept its best-selling items, deleted the worst-selling items, and added more expensive items. The end result? A rapid drop in sales as customers switched to other retailers.

There is, however, a workaround that requires your SKU architecture. Consider how customers buy your items, according to the Harvard Business Review. “Most of the time, customers don’t buy products; they buy a bundle of attributes,” argue authors Marshall Fisher and Ramnath Vaidyanathan. “Recall the last time you bought a television. Have you said, ‘I want TV X’? Or have you considered screen size, resolution, pricing, LCD vs. plasma, and brand?”

You may strategically assess your inventory to estimate demand and please customers by arranging your SKU numbers to express the traits buyers want to know about your products.

#3. Increase the effectiveness of your top profit sources.

Your SKU architecture showcases your most popular items as well as your least popular. Aside from knowing when to replenish and which products to discontinue, your SKUs can also help you get creative with your best-selling things.

Data on your top profit generators can drive judgments about in-store product displays and visual merchandising, as well as creative marketing activities that help turn over popular stock even faster.

#4. Increase customer happiness and loyalty

Because SKU numbers can be used to predict reorder points, they can also assist your customers in always finding the goods they require. This results in a shopping experience with few to no stockouts, which increases brand loyalty and happiness among customers.

Furthermore, when a product runs out of supply (which is unavoidable in the retail industry), your customers may be more inclined to wait rather than move elsewhere.

#5. Provide new suggestions to customers—and enhance sales

SKU product data is useful for more than just inventory management and sales analysis. It is also useful on the sales floor. If a product is out of stock, for example, your retail personnel can utilize their SKU knowledge to lead customers to related products. Alternatively, if a product is in stock for your consumer, your employees can recommend complementary products.

This is also commonly used on ecommerce websites. When you browse products online, sellers frequently display related items that you might be interested in. This is most commonly accomplished through a retailer’s SKU architecture, in which an algorithm is used to generate ideas with similar traits or qualities.

In Conclusion,

SKUs aren’t a one-size-fits-all solution for retailers, and the more you personalize your SKU architecture to your and your customers’ individual demands, the more likely your firm will flourish.

Understanding what is important to you, your vendors, and your consumers allows you to create an SKU architecture that allows you to manage your inventory efficiently and simply scale your retail business.

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