SKU essentials: management, strategies and best practices.
A SKU system is the backbone of any efficient logistics and distribution system. SKUs are an effective tool for managing stock, especially in logistics operations that handle a large variety of products or those that require detailed tracking and reporting.
In this post, we help you to understand the complexities of SKU management, offering insights and strategies to help you optimise your SKU system and employ best practices that will transform how you handle your inventory.
What is a SKU?
In logistics and distribution, a SKU – also sometimes called a SKU number or a SKU code – is a unique identifier for each distinct product that a business holds in its warehouse.
SKU stands for ‘stock keeping unit’ and is an alphanumeric code typically made up of around eight to twelve characters, which serves as an essential tool for tracking and managing stock and the processes surrounding it.
Primarily, a SKU allows for precision when it comes to tracking and managing inventory, providing the warehouse with a clear understanding of what items are in stock, in transit or need replenishing. This helps maintain efficient stock levels and facilitates easy and rapid identification of products, streamlines order processing and enhances the accuracy of sales data and forecasting.
For faster identification, companies label their goods with a scannable SKU, typically using a barcode or QR code. By scanning the code, all manner of processes can be automated, such as amending stock levels, assigning goods to a different bin, marking items as picked, and more.
The anatomy of a SKU.
A SKU is not just a random string of characters. It is a carefully constructed code that holds significant information about the item it represents. Specific information can be represented by the code, or parts of it, such as the type of product, the manufacturer or brand, its colour, size or weight.
The construction of a SKU can vary significantly from one business to another and each company needs to tailor its SKUs to its specific products and its tracking and operational needs. However, the underlying principle is the same – to provide a clear, concise and quick reference to each unique item in a company’s inventory.
Basic SKU format.
Basic SKUs are straightforward and typically used by smaller businesses or for products that do not require detailed differentiation.
Basic SKUs are easy to create and simple to understand and manage. They are often short and consist of just a few elements, focusing mainly on the most essential aspects of the product. For example, a basic SKU for a shirt might include a simple product code and a size indicator, like ‘SHRT-M’ for a medium shirt.
Complex SKU format.
Complex SKUs are used by larger businesses or in cases where products have multiple attributes that need to be tracked. These SKUs are longer and include detailed information about each aspect of the product. For instance, a complex SKU for a laptop might include codes for the brand, model number, processor type, RAM, storage capacity and colour.
Here are some typical components of a complex SKU:
Product code -
Two or three letters might be used in the SKU to broadly categorise the item. For example, a retailer of stationery and writing instruments might use SKUs beginning ‘FPE’ for fountain pen, ‘PAP’ for paper, ‘ACC’ for accessories and so on.
Brand code -
Instead of a product code, a warehouse might use letters that denote each different brand or manufacturer. Or, for companies with large inventories, a brand identifier on top of the product code.
Attributes codes -
These often follow the product code and provide specific details about the product. Attributes might be size, colour, style or any other relevant characteristic. For instance, ‘BLU’ might indicate the colour blue, ‘EF’ could mean an extra fine nib, and ‘10’ could mean the number of items in a pack. One or more attributes can be used and their number will depend on the range of items sold.
Unique identifier -
The final part of a SKU is usually a unique number or set of characters that distinguishes each item within its category or attribute type. This part of the SKU ensures that no two products share the same SKU, even if they are similar.
For example, a clothing retailer selling several different black t-shirts would not be able to use TSH-BLK-38 as this would only identify a black t-shirt in size 38. Adding in random extra characters or those that also denote a style or a brand would be needed to help distinguish similar items.
Creating an effective SKU system.
Developing an effective SKU system is crucial for efficient stock management. There are several SKU best practices and considerations when it comes to creating an effective SKU system.
It’s important to ensure that your SKUs are easy to understand and interpret. Having codes that are not intuitive or which are overly complex codes can lead to confusion and errors.
Establishing a clear and consistent format from the outset is vital. The format should ideally start with a category or product code, followed by brand codes, product attributes and then a unique identifier. Including a combination of letters and numbers helps avoid codes being mistaken for other codes, such product codes like an EAN or UPC, which are all numerical.
If you have a large product range then you will need detailed information in your SKUs. But try to limit the length so that your SKUs are not cumbersome. Typically, 8 to 12 characters are sufficient. You can break up SKUs using dashes to separate it into different elements. This helps with readability, making it easier to distinguish between various components of the SKU.
Try to avoid using ambiguous characters that can be mistaken for each other – for example, ‘0’ (zero) and ‘O’ (the letter O). Equally, the digit ‘1’ (one) is easily confused with both the capital letter i and the lowercase L.
Maintaining a uniform length ensures that your SKUs are consistent. You can keep all parts of a SKU the same length by incorporating leading zeros where necessary. For example, if the maximum number of items within any brand you stock is 300, start at 001 so that this element of your SKU is always three characters long.
When creating SKUs, the naming convention you choose plays a significant role. Aside from including all the essential product attributes, you should consider employing a logical hierarchy within your SKU system. For instance, you can organise the elements in a logical order, from the most general to the most specific. This helps with faster product identification.
For maximum scalability, it’s important that your SKU system will be able to accommodate future product additions without needing a complete overhaul. You can ensure this by designing your SKUs with a flexible structure that includes room for new product categories and other variations.
Keeping your SKU system consistent is vital. Consistent SKUs make it easier to track and manage your stock across various channels and multiple warehouses. It also ensures that you can accurately collect and analyse data on your stock, which is crucial for forecasting, restocking and identifying sales trends.
Use intuitive SKUs as this will help with staff training. Employees can quickly understand and apply the logic behind the SKU construction where it is easy to recognise the elements and what they refer to. For example, a SKU such as TV-SONY-55LED-4K-BLK is easily recognisable as a black 55-inch LED screen Sony TV with 4K resolution.
Benefits of using SKUs.
SKUs have benefits that collectively contribute to the overall efficiency and profitability of a business.
Firstly, SKUs play a central role in streamlining your business processes. By assigning a unique identifier to each product, you can manage your stock more effectively. The time your staff spend in locating and tracking items is significantly reduced, which brings a more efficient workflow to your whole warehouse operation. This efficiency is particularly evident in retail environments, where SKUs make it easier for staff to quickly identify products.
Stock accuracy is another key advantage of using SKUs. Using SKUs minimises the likelihood of errors that can occur with manual tracking or when using less-specific methods of identifying your products. For example, SKUs help pickers select the correct items for orders, so reducing mistakes and improving customer satisfaction.
SKUs are also instrumental in improving your reporting and analytical capabilities. They make it easier to track sales trends, monitor stock levels and understand buyer behaviour. Using SKUs, you can generate detailed reports that offer insights into which products are performing well and which aren’t. Data like this is invaluable in making informed decisions about replenishment, promotional strategies or product development.
Using SKUs also helps you to integrate data across several different sales channels or platforms, which provides a comprehensive view of your business performance.
Challenges with SKUs.
As you expand your product lines, you will inevitably face the problem of SKU proliferation. This is the rapid increase in the number of SKUs you have as new products are added or variations are introduced. Managing an ever-growing stock can become complex, often leading to challenges in tracking, stocking and selling your products efficiently.
To meet the challenges of SKU proliferation, you can regularly rationalise your SKUs. This involves periodically reviewing and streamlining your SKU portfolio in order to eliminate underperforming or redundant products. Although by implementing clear guidelines for SKU creation in the first place, you can help prevent unnecessary complexity and duplication, which means you should need to undertake this rationalisation less often.
Software solutions, particularly warehouse management systems (WMS), can also help you manage your SKUs more effectively. With sophisticated tools for stock tracking, order management and data analysis, a WMS helps you handle large volumes of SKUs systematically, ensuring accuracy and efficiency.
Practical SKU use and management.
In industries where stock management is a cornerstone of success, such as ecommerce and retail, the best practice use of SKUs is crucial.
Retailers and ecommerce providers typically handle a vast range of products, making a well-structured SKU system essential for maintaining accuracy and streamlining operations.
The sheer volume of items and the high level of sales transactions that these companies process necessitates a robust SKU system that ensures accuracy and efficiency in order fulfilment.
Effective SKU management enables these businesses to effectively manage a diverse inventory. With more precise tracking, rapid product retrieval and accurate order fulfilment, errors in shipping and handling are minimised. This provides customers with a reliable service, which ensures high levels of customer satisfaction and loyalty.