What Is It and Why It Matters For Your Business

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Ever wondered how businesses track every product they sell? They use a SKU, or stock keeping unit. This unique code simplifies sorting and labeling each item. Companies internally create SKUs and incorporate them into inventory management systems to keep everything organized.

In this article, you’ll learn about SKUs, understand their importance, and find out how to use them for your business needs. 




What is a stock keeping unit (SKU)?

A stock keeping unit is a specific code that retailers use to manage the items they have for sale. Made up of both letters and numbers, this code gives details about a product, like its brand, color, and size. For instance, a green medium-sized shirt from Brand X might have an SKU like “BRANDX-GREEN-M.” 

Each company has its own SKU system for the products it sells, so even if two stores sell the same item, their SKUs might be different. SKUs help companies keep track of their stock efficiently, and while they are distinct from model numbers, some businesses might use model numbers in their SKUs. 

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Why are SKUs important?

SKUs help shoppers differentiate between products. Say a shopper picks up a particular mystery novel; online stores might show other mystery books that customers bought using the SKU details. Such suggestions can lead to more sales, boosting the company’s profits.

Similarly, SKUs provide insights into sales trends. A shop can determine its bestsellers and underperforming items by analyzing the SKUs scanned at the checkout. This allows the business to make informed decisions about inventory management, such as restocking popular items promptly and reconsidering the placement or promotion of slower-moving products.

Other practical applications of SKUs include:

  • Establishing product reorder thresholds
  • Reconciling stock levels
  • Identifying shrinkage in inventory
  • Improving inventory tracking accuracy

How to calculate SKUs

To calculate your stock keeping units, think of every distinct version of your product. This could be variations in flavor, package size, or even design. The number of SKUs you have is the total of these different product options.

Consider you’re a seller of gourmet popcorn. You have popcorn in two flavors: cheese and caramel. You offer them in two sizes: regular and jumbo. And, there are two types of packaging: tin and box. 

So with two flavors, two sizes, and two packaging choices, you end up with 2 x 2 x 2 = 8 product combinations. That means you have eight SKUs.

Where SKUs are used 

SKUs are typically used in:

  • Retail stores
  • Warehouses
  • Brick-and-mortar stores
  • Product fulfillment centers
  • Ecommerce vendors

How are SKUs formed?

Companies create unique SKUs, and each has its own distinct method.

For instance, imagine a blue Adidas running shoe in the Ultra Boost design, size 9. Its SKU might look like this: ADI-UB-BLUE-09. 

Similarly, a container of Sunburst mango juice, sugar-free version, in a 50-ounce tin can could get a SKU from a local grocer like this: SUNB-SF-TIN-50. 

While there’s no universal formula for crafting a SKU, it’s crucial that a company to establish a consistent system. This ensures everyone in the organization follows the same approach and can easily decode the SKU. Above all, SKUs should be straightforward, allowing anyone to understand them without requiring special tools. 

Best practices for effective SKU management

Managing products is key to a thriving business, and SKUs are at the heart of it. But how do businesses keep it organized and efficient? Here are some straightforward tips to keep SKUs in check:

  • Simplicity in SKU creation: Adopt a straightforward approach when creating SKUs. Think of it like naming a file on your computer: it should be descriptive yet concise. Using a system like “manufacturer-color-size” keeps it simple. Always capitalize letters and avoid confusing characters, like “O” and “0.”
  • Know when to reorder: Instead of ordering the same quantity for every product, adjust based on sales. A basic formula to consider is: Optimal Reorder Quantity = Average Daily Units Sold x Average Lead Time. This helps in adjusting inventory levels without the headache of excess inventory.
  • Group by common features: If you sell products with variations, group SKUs by similarities such as color or size. For instance, if you offer a shirt in three colors, group those SKUs together. It aids in efficient supply chain management and also helps customers easily find variations of a product they’re interested in.
  • Review and adjust: Not all SKUs are winners. Regularly assess your inventory system. If you notice some products aren’t selling as expected, it might be time to phase them out. Holding on to unsold stock means wasted space and resources. Remember, more options aren’t always better. Offering too many choices can overwhelm customers, so focus on your bestsellers and streamline your offerings.
  • In essence, SKU management doesn’t have to be complex. By adopting a systematic and organized approach, businesses can ensure their products are always in the right place, at the right time.

    Taking action with SKUs

    SKUs are the key to smooth operations. They help sort inventory, make orders right, and reduce mistakes. By using these unique codes, you can lessen errors, make returns simpler, and build a stronger supply chain.

    Stock keeping unit FAQ 

    What is a stock keeping unit with example?

    A stock keeping unit (SKU) is a unique identifier that a manufacturer or retailer assigns to a product. It’s typically associated with an item’s bar code and is used to track inventory. For example, the SKU for a specific black t-shirt could be P1MT229TB166BK. This would serve as a unique identifier for that product, helping merchants identify it via a bar code. (To create a bar code from your SKU code, try Shopify’s free bar code generator).  

    What is the difference between a UPC and a SKU?

    The Universal Product Code (UPC) and the stock keeping unit (SKU) are distinct methods of product identification. UPCs are 12-digit numbers with bar codes representing products universally and remain consistent across all retailers. Conversely, SKUs are unique identifiers chosen by individual retailers or manufacturers for their internal tracking of inventory. A product might have different SKU numbers in across two or more stores, but its UPC will always be the same.

    What does SKU mean in manufacturing?

    In manufacturing, a SKU is like a name tag for products. It’s a unique code—each product gets its own. This code helps makers find items fast and keep their stock in order.

    What a SKU is not

    Some people mistake SKUs for UPC bar codes, but there’s a difference. A SKU is a unique code a business makes for its own use. On the other hand, a UPC remains constant, regardless of the seller.




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