If you’re new to the world of inventory management, you’ve likely heard the term “SKU” thrown around, and you may have some questions: what does this acronym stand for, and how does it differ from a UPC? How can SKUs best be used to optimize inventory management? This article will answer these questions and help you understand all you need to know about SKUs.
SKU stands for “stock keeping unit,” and it is typically represented by a 6- to 8-digit alphanumeric code that can be used by businesses to internally identify and track products. Products with SKUs often have a machine-readable barcode on them that allow businesses to quickly scan the code. As such, SKUs are essential to inventory management in that they enable you to quickly check the in-stock quantity of each product at any given time.
If you reach for a nearby can of soda, you’ll notice that the barcode on it is not alphanumeric — it only contains numbers. Further, that barcode is not strictly used internally; it can be used by resellers, just as your local grocer did when the cashier scanned it during checkout. This type of barcode is not a SKU; it’s a UPC, and there are some important distinctions between the two.
A UPC, or “universal product code,” is a 12-digit numeric code found on trade items that is typically used to complete transactions. True to their name, UPCs are universal. That same can of Coke will have the same UPC regardless of where you buy it. The SKU will differ, depending on where the product was manufactured, bottled/canned, and shipped from. In short, UPCs are used for sales, while SKUs are used for inventory management. Implementing a UPC tracking system may prove beneficial when it comes to managing inventory, but, unlike SKUs, the codes cannot be customized for internal purposes.
If you need to figure out where goods are in the supply chain, the quantity of specific items you have in stock, or where those items are located in your warehouse/retail store, you can do so using SKUs in combination with modern inventory management hardware and software. Much of a business’s profitability hinges on its ability to manage stock efficiently, and SKUs are required to do so. SKUs permit businesses to do many things to improve efficiency, including:
Because SKUs are created internally, they can be optimized to suit each business’s style of organization. Items can be categorized by type, department, or manufacturer, then coded accordingly. When created with this in mind, the SKU of each item can indicate where it is physically located in the warehouse, dramatically improving organization, and reducing time wasted attempting to locate goods. When used in a retail environment, SKUs can be used to streamline the shopping experience, and improve customer satisfaction.
While UPCs are usually scanned during checkout rather than SKUs, the latter can still help facilitate sales. Customer service representatives can use SKUs to determine if specific goods are available, as well as where they can be located. If there are any questions about pricing, reps can also use SKUs to clarify them and prevent misunderstandings. Further, if a barcode is difficult to scan or is damaged, cashiers can use SKUs instead to complete transactions.
In addition to improving profits through better organization and customer service, SKUs give entrepreneurs vital information regarding profits. Because SKUs are used to track the quantities of different items, business owners can use them to determine sales, shrinkage due to waste or theft, and item shortages/overages. These statistics are essential when it comes to calculating profit.
You’re now aware of the benefits of implementing SKUs in your inventory management system — but what are the best practices for doing so? The following advice can help those looking to create a SKU system:
SKU numbers should be created in a way that clearly indicates categories and variants of goods. Employees should be able to quickly glean which item is being referred to when looking up a SKU. If they need to refer to a legend to decipher your SKUs, you’re doing it wrong.
Take advantage of the fact that SKUs are alphanumeric. For instance, if you run a clothing boutique and need to create a code for a white Ralph Lauren winter coat, you could designate it:
This clearly designates the brand (RL = Ralph Lauren), style of item (WC = winter coat), the color (WH = white), and the item in the subset (12 = the twelfth item of that type). Employees could quickly determine what the item is and locate it with minimum fuss.
The above example illustrates another key part of creating an effective SKU system: present vital information first. In general, this means initially presenting broader information, then getting increasingly more specific with each subsequent attribute.
The example above presents the brand first, then the type of good, then the color variant of that good, and finally the specific product number. This makes it easy for customer service representatives to narrow down the location of goods, even if they only have a partial SKU. This system also helps reps locate similar products if customers want to see alternatives to a specific product.
Don’t burden your SKUs with unnecessary attributes or obtuse coding systems. The attributes you’ll want to include in your SKUs are largely contextual. For instance, while the designer of a clothing item might be highly relevant to a clothing boutique, a grocer probably wouldn’t want to designate the producer of a bunch of bananas. That information is less useful to customers and employees.
Identify possible points of confusion, then nip them in the bud during the code creation process. For example:
These are some examples of how you can avoid overcomplicating your SKUs. Prevent a potential headache later by establishing a clear and understandable SKU system now.