SKU (Stock Keeping Units) : A Small Business Guide

Small Business

December 23, 2022

If you’re running a retail business, you’re probably aware of how challenging inventory management can be. You likely already know about stock keeping units or SKUs and that some of the biggest retailers in the world use them to track the comings and goings of certain products.

Have you been wondering how you can leverage SKUs for your own business?

This guide has all you need to know about these numbers and letters. It will help you straighten out the what, how, why, and where of SKUs.

Let’s start with a quick introduction.

What Is a Stock Keeping Unit (SKU)?

A stock keeping unit or SKU is a unique alphanumeric code that retailers use to identify and track inventory items internally.

SKUs are unique to the company selling the product, and no two products should have the same SKU.

Efficiently leveraging SKUs streamlines inventory identification and tracking. Each code is human-readable and includes all the key product data needed to identify a product.

How and Where Are Stock Keeping Units (SKUs) Used?

You will find SKUs in retail stores, warehouses, product fulfillment centers, catalogs, and even eCommerce vendors.

SKUs help businesses simplify their internal operations in many ways, some of which include:

Tracking quantity of available products
Optimizing product catalogs
Identifying inventory shrinkage
Creating threshold limits for placing new orders
Collecting data on sales levels and trends
Utilizing sales data for eCommerce marketing
Deciding what mix of products to keep on shelves
Analyzing buyer behavior
Improving response times
Updating inventory in real time
Determining product profitability
Recommending related products and running cross-promotions for marketing
Sales forecasting
And more

Are SKUs the Same as Barcodes or UPCs?

Despite appearing similar, SKUs are different from barcodes and UPCs.

Universal Product Codes (UPCs) and barcodes are used to identify the manufacturer and item. They are generated and assigned by GS1, an international standards organization. These universal codes are meant for external tracking and must remain the same across all businesses worldwide.

In contrast, SKUs are meant to be read and used for internal operations and sales tracking purposes. These codes are unique to the business using them, and each company can develop its own SKU system to suit its operations.

However, many businesses tie their SKUs to their barcodes or UPCs to simplify and optimize internal tracking along with scanning, checkout, or shipping.

Note that embedding SKUs with barcodes or UPCs comes with the risk of overlapping codes or mix-ups. To prevent this, businesses should ensure they have a system to coordinate with business partners that may have similar inventory identification practices.

How To Create and Set up SKUs for Products

There are no written rules about how a company can create SKUs. Because they are an internal tool only for that business’ use, they can follow any format or convention that their employees, suppliers, and other partners can follow.

Businesses are also free to use, copy, or learn from their competitors’ SKU practices.

If you’re interested in creating SKUs for your business but don’t know how to go about it, here are some guidelines for you:

1. Identify the Product Characteristics You Need to Track

SKUs can include a combination of letters, numbers, or characters that represent characteristics of the products they identify.

Here’s an example of an SKU for a T-shirt and the features the characters represent:

VX-W-SHRT-T-BLK-MED

VX – Vendor “X”
W – Women
SHRT – Shirt
T – T-shirt
BLK – Black
MED – Medium

Every character in this example is human-readable and, more importantly, represents a crucial product feature that sets it apart from others.

When creating your own SKU system, choose the most important product characteristics you want to include. Use clear and identifiable elements that your employees and business partners can easily decode with one glance.

2. Calculate the Number of SKUs You Need for Every Product

Take stock of all the distinct products in your inventory. Note the different sizes, colors, prices, and other variations you offer for a particular product type and record the numbers.

The number of product variations is the number of SKUs you’ll need for that product type.

Here’s an example that’ll give you a better idea:

Let’s say your retail business sells T-shirts in two styles, and every style is available in three colors and three sizes. Let’s calculate the number of SKUs/ variations for the T-shirt category.

For the main category of T-shirts, you’ve got:

2 styles

3 color options

3 size options

Multiplying these subcategories will give you the total number of T-shirt variations and the SKUs you need. That is:

2 * 3 * 3 = 18

Therefore, you need to create 18 SKUs for all the T-shirts you sell.

3. Assign Alphanumeric Codes to Each Product Characteristic

Next, you should assign an alphanumeric code to each product characteristic. To do this, you need an understanding of the logic behind an SKU number.

The first part of the SKU should provide information about the supplier, product category, or department. These characters identify the broadest and main identifying features of the product.

The next set of characters should specify a subcategory feature of the product. These can include the brand, user, color, or size.

The last few characters must identify the product’s sequence in your inventory, how many are left, and when it was ordered. These facilitate the sales and inventory tracking function of the SKU.

The previous example does not have a sequence identifier. Here’s what it looks like with one:

VX-W-SHRT-T-BLK-MED-003

Depending on the type of business you’re running and the size of its product catalog, your SKU may look very different. It can be shorter or longer, and your chosen characters may differ, too.

Remember that for every product variation you offer, you will need multiple SKUs.

4. Link the Codes Into an SKU

The final step is linking codes assigned to every characteristic in a way that makes sense and is easy to decode.

Now you’ve created your own SKU format for all products in your inventory.

Tips To Come Up With a Coding Scheme for Your SKUs

Are you ready to create your unique SKU coding convention?

Keep these pointers in mind:

Ensure the SKU format is simple, human-readable, and unique
Keep the SKU length short and limited to 8 to 12 characters
Prioritize your top-selling product characteristics to simplify retail operations for your employees and business partners
Try to make the first character in the SKU a letter
Include key defining characteristics of the product
Do not use zeroes or special characters
Do not use spaces
Avoid using letters that resemble numbers
Your SKU format should remain consistent for years to come

What Are the Benefits of Using SKUs?

Improve Inventory Tracking

From locating products quickly to getting real-time updates on inventory levels, SKUs will make tracking inventory a breeze.

Spot Shrinkages

Shrinkages can mean huge losses for businesses in terms of profit and consumers. SKUs enable brands to track shrinkages and respond to them quickly.

Replenish Inventory

SKUs will do wonders for inventory tracking, which will tell you when it’s time to reorder and how many more items you need to bring in to meet customer demand.

Identify Profitable Items

With SKUs and the formulas for sales ratio and SKU ratio, you can easily calculate which products are generating the highest profits.

You can identify slow-moving inventory items and develop strategies to improve the turnover ratio.

Develop Remarketing Strategies

By identifying market trends for particular SKUs, you can plan remarketing strategies for your products.

Prevent Consumer Poaching

When retailers advertise discounts, their competitors can poach customers by matching prices and other marketing strategies. This practice is common when businesses use the manufacturer’s model numbers and codes in their ads.

The same isn’t possible when retailers use SKUs instead. Since these codes are unique to the business, it is difficult for customers to find competitors’ products for comparison.

Improve Consumer Experience

Maintaining optimum inventory levels means you can deliver in-demand products without delay. This ensures a positive customer experience and keeps them supporting your brand.

Ecommerce stores can also improve overall customer experience by maintaining ideal stock levels throughout the year, offering attractive deals, and running cross-promotional campaigns to boost conversions.

Reduce Errors

With SKUs, you can improve the accuracy of product warehousing and shipping, significantly reducing errors in overall operations.

Boost Demand and Sales Forecasting

Tracking SKUs and insights from sales can also help you understand how your products are selling. You can use this data to predict demand and make arrangements to ensure optimum inventory levels, staffing needs, cash flow, logistics, etc.

How Can Your Business Track, Scan, and Manage SKUs for Products?

Managing SKUs is just as important as creating an SKU scheme. Done properly, SKU management will give your business easy access to sales data and financial insights.

With this data, you can analyze the carrying costs for product type and product profitability to optimize inventory and purchasing levels.

The process has both manual methods and automated ones. If you want to try the manual method, you’ll have to do some complex calculations.

These include:

SKU Ratio

The SKU ratio gives you an estimate of the number of products that fall within the profit range of your business.

To calculate your SKU ratio:

Open a spreadsheet and list all your SKUs in it
List details like the price, cost to business, and gross profit

Gross profit = Price – Cost to business

Create another list in the spreadsheets for gross profit ranges ($10-$20, $20-$30, and so on)
List the SKUs that fall into each gross profit range
Divide the number of SKUs in each range by the total SKUs and multiply them by 100

The resulting figure is the SKU ratio for each gross profit range.

Sales Ratio

The sales ratio gives you the number of units sold for every gross profit range.

Use the gross profit ranges to determine units sold within a given period
Divide the number of units sold for every gross profit range by the total units sold and multiply by 100

The result is the sales ratio for every profit range.

Once you have SKU and sales ratios, you can use them to understand which SKUs are giving you the best returns. These are the products with a high sales ratio that’s also higher than the SKU ratio.

You can make another spreadsheet or graph to compare the metrics for the sales ratio against the SKU ratio. You can learn what products are generating the highest returns and those leading to losses.

With an automated approach, you could get these calculations and insights within minutes. And a reliable way to incorporate automation into your operations is choosing a partner like Nest Egg.

With Nest Egg, you can easily scan product barcodes, track inventory levels, sales, and purchases, and even share your data on the cloud. The app syncs across multiple devices seamlessly and securely.

It enables complex product taxonomy management through categories and subcategories. So whatever your inventory size, you can list products to maintain transparency and accuracy.

It integrates easily with other systems you’re already using.

What’s more? You can also manage contacts of customers, suppliers, and OEMs on one platform.

And if you’re looking to incorporate a barcode-embedded SKU for your business, Nest Egg can scan it too!

Frequently Asked Questions

Can two products have the same SKU?

No. SKUs have unique product identifiers for each item, so two products can’t have the same SKU.

How are SKUs and serial numbers different?

The SKUs assigned by a business to a set or type of products from the same order may overlap. However, serial numbers cannot overlap because they identify individual products within the same product group.

To Summarize

Using SKUs can streamline operations, save time, and increase output. It keeps inventory errors at bay, enhances visibility, and ensures accuracy.

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