Every product has a journey — a series of steps that get it from the factory floor to the customer’s hands.
If your company only sells one product, tracking that journey isn’t too difficult. But as soon as you add another item to your catalog, it’s harder to do things like fulfill orders, keep accurate inventory counts, and avoid stockouts or excess inventory.
That’s where SKU numbers come in. They uniquely identify every item you sell in every size, shape, and color to avoid mix-ups.
Here’s how to use SKUs to optimize inventory management.
What’s a SKU number and why is it important?
SKU stands for “stock-keeping unit,” an alphanumeric code that acts as a product’s fingerprint within inventory. It’s usually 6–8 characters long and describes the item and its attributes. For example, the SKU for a black leather jacket in size medium might be “LJ-BLK-M.” A large version of the same jacket would have the SKU “LJ-BLK-L.”
These identifiers are vital to inventory management because they simplify product identification and tracking. You can check the jacket’s size without unfolding it to check its tag, saving time and ensuring every order you pack contains the right item. Plus, SKUs often appear next to machine-readable barcodes, making it easy to scan and instantly access details like the product’s location, available quantity, and expiration date.
SKUs, UPCs, and EANs: Understanding the differences
Imagine you’re holding a can of Coca-Cola. You flip it around and see a barcode on the back. But what’s printed under the barcode doesn’t look like the SKUs in the black jacket example.
Here’s why: The SKUs you assign to your products are unique to your company. For you, “LJ-BLK-M” translates to “medium black leather jacket,” but another retailer might use the same SKU for their medium black long johns. SKUs are only meaningful within your manufacturing, warehousing, and shipping systems. They aren’t important to customers or other companies because they don’t have to organize your items.
Additionally, not all identifiers are SKUs. The “049000006346” you see under the barcode on your can of Coke isn’t a SKU, and neither is the “7613035884854” printed on a Nestle chocolate bar. They’re examples of a universal product code (UPC) or European article number (EAN). These are entirely unique and used by manufacturers, distributors, and retailers, no matter where or when the items are sold.
UPCs are 12-digit numeric codes primarily used in the United States and Canada, while EANs are 13-digit versions used internationally. Both are universal and standardized for global product identification and sales transactions.
These might seem like unnecessary numbers and letters, but UPCs, EANs, and SKUs all have important functions. EANs and UPCs are for sales, allowing retailers to complete transactions smoothly, and SKUs are internal identifiers that help you manage inventory. While implementing an EAN or UPC tracking system could help with inventory management, you can’t customize these numbers like SKUs.
Manual versus automated SKU management
There are two primary methods for managing SKUs: manual and automated. Here’s a quick breakdown of each.
Manual SKU management
The hands-on approach requires that you create and maintain the numbers yourself, usually with spreadsheets or a basic SKU generator tool.
Pros
- Low-cost: Since there’s no need for specialized software, managing SKUs manually is a budget-friendly option for startups or small businesses.
- Controllable: How you structure and format SKUs is entirely up to you.
- Flexible: Depending on how you decide to track the numbers, it’s not hard to make quick adjustments when needed.
Cons
- Time-consuming: Creating and updating SKUs by hand takes time, and it only gets more time-consuming as your inventory grows.
- Prone to error: Manual SKU management leaves the door open to human error, which can lead to things like duplicate or inconsistent SKUs.
- Lacking integration: Manual SKUs don’t easily integrate with point-of-sale (POS) systems or inventory tracking software.
Automated SKU management
This method relies on inventory management software to assign, manage, and generate SKUs.
Pros
- Efficient: Software automates the process, saving time and reducing manual labor.
- Accurate: Automation cuts out the human element, reducing the risk of error.
- Scalable: Once your inventory management software is up and running, you can easily handle larger, more complex inventories as your business grows. The infrastructure’s already in place.
- Easy to integrate: SKU management systems integrate seamlessly with inventory tracking and management systems.
- Advanced features: Many software solutions offer extra features like scannable barcodes, reorder point calculations, and sales analysis.
Cons
- Initial investment: Automation saves money in the long run, but software can be expensive. There’s a bigger upfront cost than setting things up manually.
- Learning curve: Your staff will need training to use the software effectively.
- Less direct control: You might have less flexibility in customizing SKU formats than you would managing things by hand.
The various uses of SKUs
The value of SKUs goes far beyond the warehouse. Here are some of the other ways they help your business.
Organization
By assigning unique codes to each product variation, you create a structured system for categorizing items by type, color, or any other relevant attribute. Categorization makes it much easier to locate products in your warehouse or retail store, streamlining order fulfillment and saving valuable time.
Easier customer checkout
Most retailers scan UPCs, not SKUs, during checkout. But SKUs still facilitate sales. They help customer service representatives determine if specific goods are available and where they’re located. Representatives also use SKUs to answer pricing questions and prevent misunderstandings with customers.
Profitability and sales tracking
By analyzing the type and amount of SKUs sold, you gain insights into each product’s profitability, leading to informed decisions about pricing, promotions, and inventory management. This data-driven approach maximizes profits and minimizes losses.
Upselling and cross-selling
Tracking SKUs reveals which products people frequently purchase together or which higher-priced items complement others. This lets you make targeted recommendations to customers during checkout or through personalized marketing campaigns. By suggesting relevant and valuable products to kit together, you increase average order value and enhance the customer experience.
5 SKU best practices
Before you implement an effective SKU system, here are some tips for success.
1. Create clear, organized codes
A well-structured SKU code is a roadmap to your product. It should be easy to understand and decipher, even for new employees. Here’s how to create a standardized formula:
- Logical structure: Start with broader categories and then get more specific. For example, a clothing retailer might use a structure like “brand-product type-color-size” (e.g., “GAP-TSHIRT-RED-M”).
- Consistent formatting: Use hyphens, underscores, or other separators to visually distinguish attributes.
- Meaningful abbreviations: The SKU system should have clear, easy-to-remember abbreviations (e.g., “WH” for white, “L” for large).
- Avoid special characters: Stick to alphanumeric characters to ensure compatibility with various systems.
2. Start with the most important information
The order of attributes in your SKU should reflect their importance for product identification and retrieval. Start with the broadest category (like brand or product type), followed by increasingly specific attributes (like color, size, or material). This structure allows for partial SKU matches so if someone only remembers part of the code, they can narrow down the search.
3. Keep it simple
Avoid overcomplicating SKUs with unnecessary details or cryptic codes. Remember, the goal is to make your inventory easier to manage, not create a puzzle.
Only include the attributes that are essential for differentiating products and that relate to your business. Avoid ambiguity, and don’t use characters that are easy to confuse, like “0” and “O.” It’s also a good idea to leave room for expansion if you plan to introduce new product lines or variations.
4. Constantly review and update
Your SKU system isn’t set in stone. As your product offerings evolve, so should your SKUs. Periodically review your SKUs to ensure they stay accurate and relevant. Create an adaptable system in case you need to add new SKUs for new products, remove discontinued items, and update existing ones if product attributes change.
5. Review sales data
Analyzing sales data tied to SKUs reveals valuable insights. Use SKU popularity to see which products are top sellers, sell slowly, or fluctuate seasonally. This information can also help you forecast demand and prevent stockouts or overstocks.
Fishbowl makes it easy
Ready to implement a digital SKU system? Fishbowl is the all-in-one inventory management solution designed to help you control stock, warehouse operations, and manufacturing workflows.
To take control of your stock and gain end-to-end visibility over your operations, schedule a Fishbowl demo. Experience scalable, user-friendly inventory management.