What is an SKU?

A Stock Keeping Unit, commonly abbreviated to SKU, is a number created to help retailers keep track of items in their inventory. Assigning SKUs to your products is critical for ecommerce as it helps businesses stay organised and on top of their inventory. In this article, we’ll guide you through creating SKUs and give ideas about how businesses can benefit from their use.

What is an SKU?

SKUs are unique identifiers assigned to individual products within an inventory, essentially serving as a shorthand way of referring to a specific item. Managing product catalogues can easily become overwhelming for any business, whether it’s a fully online ecommerce company or a brick-and-mortar shop. SKUs play a vital role in helping businesses maintain order and efficiency.

How do you create SKUs?

There are a few different ways that SKUs are created. Larger companies usually require more automated methods, while smaller companies can be more manual in their SKU creation.

Automated SKU creation

Inventory management and point of sale (POS) systems often handle SKU creation for their users. Inventory management software is recommended for growing and large businesses with a broad product inventory, as it makes adding and managing products significantly more manageable.

Manufacturers will also often assign SKUs to their products. If you’re reselling products from a third-party manufacturer, you can retain these SKUs for internal use.

Several apps and sites can generate SKUs, for example, this one from Zoho. Some of these apps provide multiple related services, like label creation and support with shipping.

Manual SKU creation

For smaller businesses with a limited inventory of products, SKUs can be created and added manually. In this case, a few guidelines for creating an SKU should be followed.

Conciseness

Keep the SKU short. Generally, you should aim to stay under 10 or 12 characters. This has the benefit of working with most inventory management systems, making it easier to transition should you ever need to.

Simplicity

A key characteristic of SKUs is simplicity. Use only numbers and letters and avoid creating an overly complex system for your different SKUs. Avoid starting SKUs with zero, as this can throw off inventory management tools and basic inventory software like Excel. The same goes for special symbols like ‘@’, ‘#’, or ‘*’. Avoid using any symbols that could be misread by software.

Consistency

Another key for SKUs is consistency. A general pattern is for the SKU to feature a sequence that starts with the broadest characteristic of the product. This could be, for example, the brand of the product. You then continue narrowing down the characteristics, continuing with features like the product type, size, and colour.

Uniqueness

Ensure that all your SKUs are unique to avoid mixing up products. Otherwise, it could create the exact problems of warehouse mix-ups and shipment delays that SKUs are designed to prevent.

Keeping these principles in mind will also help you be prepared for the future. Should your company expand and require more advanced inventory management tools, or should you simply require an expanded set of SKUs, keeping your initial ones simple, consistent, and unique will future-proof your business and ensure you can scale as needed. 

Examples of SKUs

It’s useful to see an example of a comprehensive SKU format that has been custom made for a specific business. Let’s say this is for a company that sells bags and backpacks. There are different product lines within its inventory, each with a range of products in different colours.

With that context in mind, let’s break down a potential SKU into its distinct elements:

• We’ll start with a product category code as the broadest identifier. In this case, we’ll go with “BP” for “backpack.”
  
  If your business sells different products from multiple brands, brand name might be a better choice for the broadest identifier. For example, if the company sells backpacks from both Fjällräven and JanSport, you might want to start with either ‘FJA’ or ‘JAN’.
  
  In our example, we’ll say that this company exclusively sells products under its own brand, and thus, it is sufficient to start with the product category.
  
• We’ll continue with a product line code, basically something that represents the specific subset of products. Let’s say we call this line of backpacks the “Urban Explorer”. Thus, the next part of the SKU will be “UE.”
  
• Let’s go on to a numeric identifier that distinguishes each product within the product line. We’ll start with ‘1001’.
  
• We’ll end it with a colour code showing different colour options, for example, ‘R’ for ‘red’ or ‘G’ for ‘green.’

Putting it all together, the SKU for the red Urban Explorer backpack in this format might look like this:

Red Urban Explorer Backpack SKU: BP-UE-1001-R

For the green variant, it could be:

Green Urban Explorer Backpack SKU: BP-UE-1002-G

This SKU structure provides a detailed breakdown that allows for a quick interpretation of key product details.

Why SKUs are important for ecommerce

Maintaining an organised inventory and being in control of what is selling are important aspects of running an ecommerce business. SKUs, as a major part of inventory management, play a significant role in maintaining of running a successful ecommerce business. Let’s analyse some of the benefits of SKUs for ecommerce. 

Inventory management

SKUs provide a systematic method for organising products, which is vital for managing inventory, reducing errors, and optimising storage. SKUs enable businesses to track products, which is especially valuable in periods where rapid restocking and order fulfilment are critical.

Error prevention

The systematic organisation created by SKUs also reduces the likelihood of errors in product identification, which prevents shipping mistakes and helps ensure that customers receive what they ordered. SKUs serve as quick identifiers during the picking and packing stages, speeding up the process of fulfilling orders while preventing human error. This smoother order fulfilment process also aids in pushing faster and more reliable shipments, meeting customer expectations for timely delivery.

Data analysis and forecasting

SKUs enable accurate reporting and analytics. Businesses can derive valuable insights into sales performance, popular products, and market trends by analysing SKU-level data.

SKU-level data provides valuable insights for informed decision-making. Businesses can identify top-performing products, adjust inventory levels, and optimise marketing strategies based on the analytics provided by SKUs.

Analysing SKU data also allows businesses to stay attuned to market trends. This proactive approach enables timely adjustments to product offerings and marketing campaigns to align with evolving customer preferences. In turn, this can help ecommerce businesses shape their marketing strategies to be more effective.

Understanding SKU-level performance allows businesses to target promotions, upselling, and advertising more strategically.

Best practices for SKUs

Now that you have gained insight into creating effective SKUs, understanding best practices is vital for making sure your inventory management system remains efficient.

Ensure cross-channel consistency

Maintain consistency in SKUs across any sales channels you may have. Whether selling through your website, third-party platforms, or brick-and-mortar stores, having uniform SKUs ensures accurate reporting on all your sales.

Document your SKUs

Documenting SKU information, including the structure, naming conventions, and any custom codes you may have created, is essential for clarity and future reference. This documentation serves as a valuable resource for training new team members, conducting audits, and ensuring continuity in your inventory management practices.

SKU audits

Over time, SKU databases can end up with outdated or irrelevant codes. Regular audits and cleanup processes are essential to maintain an organised and efficient SKU system. Identify and eliminate SKUs that are no longer in use to make sure your database remains clean and up to date.

SKUs – a key element to inventory management

SKUs are a foundational part of inventory management, accurate order fulfilment, and data-driven decision-making. By following the guidelines to SKU creation, considering scalability and future changes, and holding regular audits, you have the pillars of effective inventory management.