Stock Keeping Unit

MoneyBestPal Team
By : personMoneyBestPal Team
March 17, 2023
A special identification number that is provided to a particular good or item to make inventory management and tracking easier.
Image: Moneybestpal.com

Main Findings

  • Stock-keeping unit (SKU): A special identification number that is provided to a particular good or item to make inventory management and tracking easier.
  • Benefits of SKUs: SKUs help businesses quickly maintain and monitor their inventory levels, determine which goods are the most in-demand and profitable, and streamline their purchasing and restocking procedures.
  • Components of SKUs: SKUs are often made up of a combination of letters, numbers, or symbols that stand in for crucial details about the product, such as its maker, product category, size, color, and other pertinent characteristics.


A stock-keeping unit or SKU is a unique code that is assigned to a product for the purpose of inventory management and tracking.


An SKU consists of letters and numbers that identify characteristics of each product, such as manufacturer, brand, style, color, and size. For example, the SKU for a blue Nike T-shirt size M may be "NIKE-TS-BLU-M". SKUs differ from model numbers or UPC codes, which are standardized across products and manufacturers. SKUs are created by retailers to suit their own needs and preferences.



Why use SKUs?

SKUs are used by retailers to keep track of their inventory levels, sales performance, profitability, and customer behavior. By using SKUs, retailers can:

  • Scan products at the point of sale (POS) and automatically update their inventory records.
  • Monitor which products are selling well and which ones are not.
  • Analyze which products are more profitable and which ones have lower margins.
  • Optimize their product assortment and pricing strategies.
  • Identify reorder points and avoid stockouts or overstocking.
  • Improve customer service and satisfaction by finding products quickly and accurately.
  • Cross-sell or upsell related products based on SKU information.



The formula for creating SKUs

There is no universal formula for creating SKUs, as different retailers may have different criteria and preferences for their products. However, some general guidelines for creating SKUs are:

  • Use alphanumeric characters only (no spaces or symbols).
  • Use consistent abbreviations for product attributes (e.g., BLU for blue, TS for T-shirt).
  • Use dashes or slashes to separate different attributes (e.g., NIKE-TS-BLU-M).
  • Start with the most important or distinctive attribute (e.g., brand, category, style).
  • Limit the length of the SKU to 8 to 12 characters.
  • Avoid using leading zeros or letters that can be confused with numbers (e.g., O, I).



How to calculate SKUs

To calculate the number of SKUs for a product category, multiply the number of variations for each attribute. For example, if a retailer sells T-shirts in three brands (Nike, Adidas, Reebok), four colors (blue, red, green, black), and five sizes (S, M, L, XL, XXL), the number of SKUs for T-shirts is:


SKUs = 3 x 4 x 5 = 60


This means that the retailer needs to create 60 unique codes for each combination of brand, color, and size for T-shirts.



How to Calculate Inventory Levels Using SKUs

One of the main benefits of using SKUs is that they help retailers to monitor and manage their inventory levels. By scanning the SKU code at the point of sale (POS), retailers can automatically update their inventory records and track how many units of each product are available, sold, or reordered.


To calculate inventory levels using SKUs, retailers can use the following formula:


Inventory Level = Beginning Inventory + Purchases - Sales - Shrinkage


Where:

  • Beginning Inventory is the number of units of a product at the start of a period.
  • Purchases is the number of units of a product bought during the period.
  • Sales is the number of units of a product sold during the period.
  • Shrinkage is the number of units of a product lost due to theft, damage, or error during the period.


For example, suppose a retailer has 100 units of a product with SKU SHI-COT-BLU-MED-BX at the beginning of January. During January, they buy 50 more units and sell 80 units. They also lose 5 units due to shrinkage. The inventory level at the end of January is:


Inventory Level = 100 + 50 - 80 - 5

Inventory Level = 65


Using SKUs to calculate inventory levels can help retailers to optimize their inventory management by:

  • Reducing overstocking or understocking of products.
  • Improving cash flow and profitability by minimizing inventory holding costs.
  • Enhancing customer satisfaction by ensuring product availability and variety.
  • Identifying best-selling and slow-moving products.
  • Analyzing sales trends and patterns.
  • Setting reorder points and quantities based on demand and lead time.



Examples of SKUs

Here are some examples of how different retailers may use SKUs to label their products:

A bookstore may use SKUs that include the book title, author, genre, format, and edition. For example, a SKU for a hardcover copy of Pride and Prejudice by Jane Austen in the fiction genre could be:

PRI-AUS-FIC-HC


A jewelry store may use SKUs that include the product type, material, color, size, and style. For example, an SKU for a gold ring with a diamond in size 7 and a classic style could be:

RIN-GOL-DIA-07-CLA


A grocery store may use SKUs that include the product category, subcategory, brand, weight or volume, and flavor. For example, a SKU for a 500 ml bottle of orange juice from Brand Y could be:

JUI-CIT-BY-500-ORA



Limitations of SKUs

While SKUs are useful tools for inventory management and tracking, they also have some limitations that retailers should be aware of:

  • Creating and maintaining SKUs can be time-consuming and labor-intensive, especially for retailers with large or diverse product assortments.
  • SKUs are not standardized across different retailers or industries, which may cause confusion or inconsistency when dealing with suppliers, distributors, or customers.
  • SKUs are not the same as universal product codes (UPCs), which are standardized barcodes that identify products globally. Retailers may need to use both SKUs and UPCs to comply with industry regulations and customer expectations.
  • SKUs may not capture all the relevant information or attributes of a product, such as quality, condition, or expiration date.
  • SKUs may need to be updated or changed frequently to reflect changes in product features, prices, or availability.



Conclusion

SKUs are unique codes that identify the characteristics of a product and help retailers to track inventory levels, sales data, and reorder points. SKUs can be calculated using a formula that combines alphanumeric codes that represent product attributes.


SKUs can help retailers optimize their inventory management by reducing costs, improving cash flow, enhancing customer satisfaction, and analyzing sales trends. However, SKUs also have some limitations, such as being time-consuming, non-standardized, and incomplete.


References


FAQ

SKU plays a crucial role in inventory management. It helps in tracking and managing the inventory levels of each specific product, preventing stockouts or overstocking.

While both SKU and barcode are used for product identification, they serve different purposes. SKU is a unique identifier set by the retailer and is used for internal tracking. 

On the other hand, a barcode is a universal product code set by the manufacturer and is used across different retail platforms.

No, two different products cannot have the same SKU. Each SKU is unique to a specific product variant, including its size, color, and other attributes.

SKU helps in improving the shopping experience by enabling quick and accurate product identification. This facilitates faster checkouts, easy product search, and efficient customer service.

Yes, SKU can be used for forecasting demand. By analyzing the sales data associated with each SKU, retailers can predict future demand patterns and make informed inventory decisions.

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