What is a Stock Keeping Unit (SKU)?

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Definition:

A stock keeping unit, or SKU, is an internal code that businesses use to identify their products and keep track of inventory.

🤔 Understanding stock keeping units

A SKU, or stock keeping unit, is a code that businesses use to identify their products and keep track of inventory. The company assigns its own SKU to each product, made up of a combination of numbers and letters that indicate information like the manufacturer, price, color, or size of the product. SKUs allow retailers or other businesses to easily monitor how much of each product they have in stock, which helps them manage their businesses by determining when to reorder and which products are or aren’t selling. A SKU is not the same as a Universal Product Code, which is the same for each product no matter which business is selling it.

Example

Imagine Beth owns a small home goods store. Beth is busy running her store and doesn’t want to spend a lot of time keeping track manually of what she has in stock. Beth assigns a stock keeping unit to every product in her store so she can quickly and easily check by computer to see what items she has on hand, when she needs to reorder, and which products are selling well or poorly. SKUs help Beth manage her business.

Takeaway

A SKU is like a family nickname…

Your family might have a special nickname they use to identify you, but they’re the only ones who call you that. Everyone else calls you by your real name. Likewise, a SKU is a special code that businesses use internally to identify their products.

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What is the purpose of a SKU?

The purpose of a stock keeping unit (SKU) is for companies to identify each of their products and track their inventory. A SKU is a unique code the company develops to identify a product using key features like the manufacturer, color, or size of the item.

Companies can use SKUs to automatically track the stock of their items by computer, which can save a lot of time and effort - imagine if a huge store like Walmart had to have its employees manually count every item in stock.. When a customer buys a product, the company’s point-of-sale system automatically communicates with the inventory tracking system to indicate there is now one less product in stock with that SKU. That continuous monitoring makes it easier for a company to know when it’s time to reorder a product.

SKUs can also help company managers or executives analyze their sales and how their products are faring. By tracking their products with SKUs, companies can easily see what products are selling or not selling. They can see, for example, that red crew-neck sweaters are selling better than blue sweaters, or that they have too many medium size khakis but not enough extra-large. That’s important information that allows them to better tailor the kinds of products they’re producing or ordering to what customers want.

How do you set up SKU numbers?

There are no rules when it comes to creating SKUs. Since each company creates its own, a company can choose any method that works best for them. But there’s typically a method - there’s no benefit to just assigning a random assortment of numbers and letters to each product.

Typically SKUs will detail specific characteristics about the product. For example, imagine that fictional clothing company Outfits R Us is selling a red sweater in a size medium. The SKU might look like this: ORU-SWT-RED-MED. “ORT” designates the name of the company, SWT identifies the product as a sweater, RED indicates the color, MED indicates the size.

Each SKU is unique - they shouldn’t be reused. It also works best if they avoid particular characters that might make the code confusing - the letter “O” could be mistaken for the number “0,” for instance.

Keeping SKUs organized and making sure everyone in the company understands what they show will help avoid confusion or miscommunication. Everyone at the company should be able to look at the SKU and understand that it designates a red Outfits R Us medium sweater. And when SKUs are organized in a logical fashion, it’s easier for the company to use them to make recommendations to a customer about similar products they might like.

What are the other benefits of SKU?

Other than keeping track of inventory, there are other benefits to using SKUs. When retailers stay up to date on their inventory, it avoids unpleasant surprises for customers - no more ordering and paying for something online only to find out it’s out of stock.

Using SKUs can also help retailers sell additional products to their customers. If a customer is buying a personal finance book, the company can use the book’s SKU to search for other related books and recommend them to the customer as other possible purchases.

Additionally, by using and paying attention to SKUs, a company can identify which of its products are selling well and which aren’t. Using this information, a company might decide to spend more to market on the products that are doing well. And if a product is selling poorly, a company might decide to stop selling it altogether.

Finally, using SKUs can help retailers from losing sales to their competition. Since universal product codes are the same for a product no matter where it’s sold, customers can easily find the product they want, and then use the UPC to find the same product at a competing retailer. But SKUs are specific to each retailer, so a customer can’t use it to find that product elsewhere. Similarly, using SKUs can help brick-and-mortar retailers prevent “showrooming,” where customers use a store as a showroom to browse and sample products, only to purchase them online from someone else.

What is the difference between SKUs and universal product codes?

SKUs are internal tracking codes that retailers create to keep track of their inventory. Because they are internal, 100 retailers all selling the same product would all have different SKUs for that product.

UPCs have some similarities to SKUs - they help retailers identify features such as the product’s maker, size, and color at checkout, and stores can use them for inventory purposes. But UPCs are, as the name suggests, universal; a product has the same UPC at all retailers.

The UPC consists of two main components - the familiar barcode and a unique 12-digit number. The first six numbers identify an item’s manufacturer - they’re assigned by GS1, the Global Language of Business, a nonprofit organization that develops global standards for business communication.

The next five numbers are the item number, which is assigned by the product’s maker - each product and each color or size variety has its own five-number combination. The final number is the check digit, which is the product of several calculations using the rest of the numbers in the code. This number confirms that the UPC is valid - an incorrect check digit means the UPC is invalid.

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