What is a SKU number, and how can you use it for inventory management?

What is a SKU?

A SKU is a unique alphanumeric code that identifies each of your product variations across different sizes, colors, and styles. assigned to every product in your inventory. Every brand, product, and specific version of that product across different sizes, colors, and styles should have a unique SKU number.

SKUs are used primarily to track and organize inventory in manufacturing, logistics, ecommerce, and brick-and-mortar stores. By using SKUs, your business can easily keep tabs on stock levels and identify best-selling items.

SKU examples

A shoe store might organize their SKUs using the following hierarchy:

• Department (Men’s, Women’s, Kids, etc.)

• Type (Fashion, Running, Hiking, etc.)

• Vendor (e.g., the brand)

• Shoe style (e.g., the shoe model or type of shoe)

• Color (Red, White, Green, etc.)

• Size (8, 9, 10.5, etc.)

• Model year (2023, 2022, 2021, etc.)

Using this system, the SKU for the latest Men’s Size 8 White 2024 tennis shoe might be MEN-TN-WH-8-23, while the same shoe in last year's model, blue, and size 10.5 would be MEN-TN-BL-10.5-22.

What’s the difference between SKUs and UPCs?

While both can be displayed as barcodes for inventory management, SKUs and UPCs (short for Universal Product Codes) serve different purposes.

Unlike SKUs, which help you manage your stock internally, UPCs are 12-digit codes that are recognized globally and used for external tracking throughout the supply chain. For example, a book sold in both a local bookstore and a large online retailer will have its unique ISBN displayed as a UPC, making it easier to track sales and distributions across different retail environments.

In other words, two different retailers that sell the same product will likely assign it two different SKUs, but the product will have the same UPC.

SKU vs UPC at a glance:

What’s the difference between a SKU and a serial number?

While a SKU represents a specific product variation, a serial number is a unique identifier assigned to each and every copy of a product. By tracking the product throughout its lifecycle, serial numbers help support warranty management, theft prevention, and recall effectiveness.

Say your business produces a single product in three sizes, and your first order is for 1,000 of each size. You would then have three SKUs and 3,000 serial numbers.

However, keep in mind that not all products warrant a serial number. Serial numbers are more commonly used for high-value items or those requiring stringent tracking, such as electronics, automobiles, and luxury goods.

The benefits of using SKUs

Improved inventory tracking

Ditch the manual counts and misplaced items – SKUs make it possible to monitor each product variation closely. With precise information on which items are selling and which aren’t, businesses can:

• Prevent overstocking and understocking. With SKUs, you can align your stock more accurately with consumer demand, ensuring you have just the right amount of product when and where it's needed.

• Optimize warehouse space. Are you struggling with cluttered aisles and hard-to-find items? With the insights offered by SKUs, you can place and organize products to maximize your storage layout.

• Improved supplier negotiations. With better insights into product performance, businesses can negotiate better terms with suppliers based on actual sales data and inventory needs.

Streamlined operations

SKUs make it simple to organize and categorize a product into different sizes, colors, and varieties. As a result, workers in your warehouse can zero in on the products they need to fulfill orders instead of searching through all the variations.

With a more organized warehouse and sales floor, businesses enjoy:

• Fewer fulfillment errors. Mistakes like shipping the wrong size or color can take up precious customer service resources. Handling returns can also be costly.

• Faster fulfillment times. Products categorized by SKUs are easier to locate, pick, and pack, speeding up the fulfillment process. This efficiency not only saves time but also reduces labor costs.

• More accurate inventory. When a cashier rings up a product for sale in your POS system, SKUs can help you instantly update your inventory management software. This is especially important for e-commerce, as it ensures that products are available in the fulfillment center when the customer clicks the “buy” button.

Better data analysis

SKUs go beyond simple stock tracking. They act as a treasure trove of business performance analytics, revealing trends, seasonal fluctuations, and consumer preferences. This rich business performance data empowers you to make strategic decisions that fuel profitability.

For example, with SKU insights, you can craft targeted promotions that boost sales of specific products or categories. Similarly, you might use data on slow-moving items to adjust pricing and avoid dead stock.

How to create SKU numbers

There are two ways to create SKUs: manually or using a SKU generator provided by your inventory management software. There are also online SKU generators (like this one from Zoho) that make it easier to manually create SKUs.

When creating SKUs, POS software provider Magestore recommends thinking logically:

• The first 2-3 characters should be a top-level identifier, such as product category.

• The next few characters should help narrow it down by indicating color, size, or subcategory.

• A sequential number at the end can then help you track versions so you can identify old stock still sitting on the shelf.

Mistakes to avoid with SKU numbers

While the process of assigning and managing SKU numbers is seemingly straightforward, errors can quickly snowball and affect your inventory management and overall business operations. Here are some common mistakes to avoid:

• Starting with zero. Beginning your SKU numbers with "0" can lead to confusion in certain software systems.

• Using similar characters. The use of easily confused characters like "1" and "l" or "O" and "0" can result in misidentification and errors in data entry.

• Inconsistent formatting. Maintaining a consistent format (e.g., length, use of letters/numbers) is essential for efficient scanning and data management.

• Overly complex SKUs. SKUs should be easy to understand and interpret. Avoid overly complex codes that are difficult to remember or communicate.

Use SKUs to level up your inventory management

SKUs are an essential tool for managing an important aspect of your business: your inventory. By leveraging SKUs to their full potential, you can increase your employee productivity while uncovering new insights that might help you optimize your product mix.

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