Whether you’re preparing to launch your online retail store or simply looking to better organize your vast inventory, there are benefits to having a strong SKU architecture in place. But what exactly are SKUs? Why are they so important? And are you using them effectively?
What is a SKU?
A SKU stands for “Stock Keeping Unit” and is a code used to differentiate products typically by an alphanumeric combination of 8-or-so characters.It allows you to identify every product variation so you can easily find out available quantities or create threshold limits for example.
A SKU number is assigned to a product in order to identify specific information such as, color, style, brand, gender, size and so on.
Unlike universal product codes (UPCs), SKUs are unique to your business and created byyour business, meaning they are not universal, and each retailer has their own set of SKUs for their products.
SKU codes are typically broken down into classifications and categories to indicate different variations of a single product, such as colors or sizes.
Online retailers use SKUs most commonly for tracking purposes, as they allow you to track unique information related to that product e.g. low in stock and dispatch status.
How is a SKU calculated and what are SKU examples?
The information within a SKU number should be placed in order of importance – in other words, the most needed information at the start.
Seeing as SKUs aren’t universal, it’s up to you as the retailer to tailor them to represent the relevant information for your products and customers.
The important thing to remember is that a SKU code must always be unique to an individual product.
How you combine this series of letters and numbers will need to reflect the characteristics of a specific product line.
Most point-of-sale (POS) systems will allow you to create a SKU architecture, and there are several SKU generators out there that can help too, but the process is essentially the same whether you do it manually or not.
It’s a good idea to understand how a SKU code is generated, even if you use a software to automate the process.
How to create a SKU architecture
Always start your SKU number with a top level identifier.
This could be a category, department or brand for example – “womenswear”.
Next, use the middle characters to assign unique identifiers about your product such as colors, sizes, subcategories etc. – “dresses”, “green”, “extra small”.
And finish the SKU with a sequential number.
This makes it easier to set up and identify older/newer items in a product line.
You’ll end up with something like this SKU example:
If you have internal codes for different categories and item types, your SKUs may end up being entirely numerical – this is fine too.
SKUs allow you to track individual inventory right down to their multiple variants. Including all this information in your SKU numbers is essential for efficient inventory management. As a result, constructing a successful SKU system will help you to improve the responsiveness and overall effectiveness of being able to fulfill orders and handle customer queries.
1. Simplify your SKU formats so they are easy to understand
Only include the most relevant information i.e. the details that make the item unique.
These will include things like size, color, type, season variants etc. but will of course be specific to your business.
The more straightforward the better, so keep them as short as possible and no longer than 16 characters at most.
Use dashes or underscores to separate out the information more clearly.
So, for example, instead of using a complicated string of numbers such as 1=red, 15=dress, use abbreviations that are going to be easier to recognize and understand.
E.g. Red dress from the autumn/winter 2019 collection size 10 might be=AW19-DR-R10-001
2. Place the details in order of importance
Decide on all the relevant attributes about your product, then arrange the SKU according to what’s most important.
The easiest way to think about this is how you would search for the product on your inventory management system.
What differentiator comes first?
Often you will need to start at the highest level e.g. season, collection or category, and then go from there.
The last attributes will nearly always be color and size.
3. Never use special characters, spaces or symbols
Basically, don’t use anything that could be potentially confusing.
This includes letters that look like numbers, spaces, accents and symbols.
Avoid letters like “O” for example, as this is often mistaken for “0”.
Avoid symbols that could cause unintended consequences for example, using “/” can result in Excel formatting your SKU as a date.
General rule:stick to alphanumeric SKUs and substitute spaces for either “-“ or “_”.
There are plenty of ‘SKU generators’ out there, but they will all work in the same way as you doing it manually.
Here’s a few things to always remember when generating a SKU number…
Stay within 8-12 characters
Start with a letter
Arrange according to importance
Stick to alphanumeric characters only
Never use any potentially confusing characters e.g. “O”
Make sure it’s simple and easy to understand
Only include relevant information specific to your product
When deciding which information is indeed relevant enough to include in your SKU code, always think back to the customer. What’s most important to the customer when it comes to your product - is it color, length, battery power etc?
Make sure these attributes are reflected in your SKU format so you can quickly provide your customers with the information they desire.
Is a SKU the same as a serial number and UPC number?
There are many product numbers associated with inventory management. It’s important to realize the difference between SKUs and other product numbers such as serial numbers and universal product codes (UPCs). They are designed to make it easy for sellers to identify an exact product and are not machine-readable.
SKU vs serial numbers
Serial numbers are unique numbers or groups of numbers and letters most commonly used to identify an individual piece of hardware or software, although other things can have serial numbers too, such as banknotes.
Serial numbers are not the same as SKUs.
They are used to track the ownership information of an item and can also be used to track warranty information, unlike SKUs which allow retailers to keep track of each item of stock.
The two main types of serial number are hardware serial numbers and software serial numbers.
Let's say you sell silver 2019 MacBook Pros.
They will all have the same SKU number, but each laptop will have a different serial number, so if anything goes wrong with the hardware for example, you'd be able to identify exactly which MacBook it was.
SKU vs UPC
UPC numbers (universal product codes) are also different to SKUs.
These codes are made up of a 12-digit number that runs along the bottom of a barcode and is universal, meaning anyone with a barcode scanner can read this number.
A UPC number is not unique to a store.
For example, if two retailers are selling the same item, they will have the same UPC but different SKUs.
Examples of how to use a SKU number
Firstly, as you already know, implementing a solid SKU system will help you to track your inventory more efficiently.
This means that you’ll always know where stock is and how much you have available.
The key to best practice inventory management is that the more you know about your stock levels and product movements, the better equipped you’ll be to make data-driven decisions about future purchasing.
SKUs allow you to determine what your customers want, where you can cut costs and where you should focus your budget, as they represent an individual item including its specific variants e.g. season, size, color.
Ensuring a good SKU system is essential for inventory optimization, as it means you can identify slow-moving products and reduce the carrying costs involved with overstocking these items.
In a warehouse filled with potentially thousands of products, missing items can easily be overlooked.
Inventory shrinkage is a common issue for many business owners.
However, with the ability to narrow down products to their individual SKUs, it makes it significantly harder for items to go missing, therefore minimizing the opportunity for theft.
Set reorder points
Having SKU numbers allows you to set reorder points for each product and its variants, so you are always made aware when you need to reorder stock.
Monitoring which products, and moreover which variants, are selling best, will help you to determine what to invest more in and what to consider discontinuing.
Being able to set individual reorder points ensures you’ll never go out of stock or find yourself carrying unnecessary costs for excess stock.
So, are you using SKUs effectively?
To summarize, every ecommerce business should label their products with SKU numbers, so that they can easily recognize and track their individual inventory, including all variants, and make informed decisions about where to invest more going forward.
SKUs are entirely unique to a specific product and differ to other product identifying codes such as serial numbers and UPCs.
When building your SKU architecture, the most important thing to remember is to keep it as simple and easy to read as possible.