If you are preparing to start a business or already have a company that deals with stock, you probably have heard about what is SKU in inventory management. You might even be already familiar with what it means and how to implement it. But many people lack a full understanding of SKUs. It’s important to have a broad view of this tool as it’s a key component in inventory management. Let’s take a look at a full guide to SKUs, what is SKU in inventory management, the importance, tips, and more.
What Is SKU In Inventory Management?
A Stock Keeping Unit (SKU) is a unique identifier or product code that accompanies products and differentiates them from other items. Same products can have different SKUs depending on different attributes. Those refer to the brand, description, department, store location, material, price, size, color, packaging, warranty terms, and more.
Other terms used for SKU are:
- Item code
- Item number
- Item ID
- Product number
- Product ID
- Product Code
An SKU usually consists of 8 to 32 alphanumeric characters. This product code is used in inventory management to search and identify stock based on individual variants of every product. An efficient SKU system can increase productivity and effectiveness, as well as help to fulfill orders faster.
Why Are SKUs Important?
When you deal with a lot of inventory, using identification numbers for your products is important. Many times, items might look similar or there is just an immense quantity of them. By using identification numbers it is significantly easier to locate the products. Let’s see more in-depth the reasons why you need to implement SKUs in your inventory management.
1. Differentiation between products
If your company has products like clothing items, the inventory management process might be more complicated. For example, those items usually look similar but might differ in size. Having the same product but with one small difference can complicate everything. In situations like these, using SKUs will make the process significantly easier as depending on the combination of different parameters, every piece will have a different SKU. Therefore, you will not confuse a small-sized blue t-shirt with a medium-sized blue t-shirt for example.
2. Better Organization
Organization is very important in inventory management. It’s not efficient to keep all the products together without any separation. SKUs provide a new way of organization that you can follow. For example, you can keep items with similar SKUs in one section. If an SKU contains a specific size of an item, you can keep those products in that specific size in one section of the warehouse. This way, if you need to quickly grab an item for an order, you will know in which section you should look for it.
3. Maximizes Warehouse Resources
Inventory holding costs are the fees for storing items in a warehouse. The more space you take, the bigger warehouse you need. For instance, unorganized inventory might take up more space than necessary, especially if it consists of items that don’t have demand. This will result in increased inventory holding costs. With SKUs, you can organize your inventory more efficiently and have an insight into which items sell and which do not. Therefore, you can maximize your resources.
4. Quick Search
Good inventory management is based on speed and efficiency. When you quickly fulfill orders, customers are more satisfied. That is why you need a way to identify inventory inside the warehouse as fast as possible. With the combination of SKUs and inventory management software, you can look up an item with its unique number and see where it’s located.
5. Simplifies the picking and packing process
As mentioned above, SKUs help to quickly search for items. This results in a faster picking and packing process. When you receive an order, you need to gather all the products included and prepare them for shipment. If you cannot locate your inventory inside the warehouse, this process will take more time. SKUs help with locating and gathering the items quicker inside the warehouse to prepare them for shipping.
6. Easier Physical Counting of Inventory
Physical counting of inventory requires a lot of preparation and sometimes it has to happen more than once a year. SKUs help with the organization of your inventory. Thus, when the time comes for the physical counting of inventory, the process will be significantly easier and smoother. Since this process is about counting your inventory and comparing it against recorded numbers, SKUs can simplify it. ID numbers of products usually appear on your records in the system, so the counting and comparison won’t be as challenging.
7. Reduces Errors
Human errors are part of inventory management. Since some products look alike, it’s not impossible to mistake items. By automating different processes, you can reduce human errors. With an SKU system, every product has a different identification number depending on different parameters. Thus, there is a smaller chance of confusing products with each other when looking at their SKUs.
8. Identifying Profitable Items
By implementing an SKU system, it is quite simple to identify the items that have a demand. For example, with clothing, it can get tricky to find which exactly shirt, color, and size combination has had a higher demand. The same goes for pieces of furniture. Maybe one color and size of a couch has a higher demand than others. By implementing SKUs, it is easier to see which SKU has had higher demand and then identify which item it is.
9. Better Customer Service
Since SKUs make the whole process of inventory management significantly quicker and easier, they have an impact on customer service as well. Customer satisfaction is very important in the success of a business. Customers as more satisfied and happy when you complete their orders quickly. As stated previously, SKUs help identify products faster as well as simplify the picking and packing process. Also, they minimize human errors. This means that fewer mistakes happen and orders arrive quicker to customers. Additionally, if a customer needs help finding something, for example, different sizes of an item, it’s more feasible for the employee to use SKUs.
10. Easier Return Process
The return process is generally complicated. But, by implementing different tools, it can be simplified. Using SKUs can help with that. For instance, if a customer returns a product that has an SKU number, it will not be as hard to find where the product belongs. Also, with an SKU we can match the product to the one reported on the receipt. Is it the same product? If not, we can see the mistake that occurred and fix it.
Where Are SKUs Used?
Besides knowing what is SKU in inventory management, you also need to know where SKUs are exactly used. Inventory management requires SKUs and other identification numbers in order to operate efficiently. Places that require inventory management, thus also SKUs, are warehouses, retail stores, catalogs, online retailers, product fulfillment centers, and wholesale.
Examples of SKUs
If your business sells clothing, you could choose parameters like item type, color, gender, and size to create SKUs. If you have black jeans for males that are size medium, the SKU could look something like this: JS-BK-ML-MD
On the other hand, if your business sells products like phones, you can have parameters like brand, item, color, and memory. The generated SKU for a black Apple iPhone 8 with 128GB could be A-P8-BK-128.
As mentioned above, SKUs usually contain 8 to 32 alphanumeric characters. Megaventory can handle up to 100 characters so you can go for a more detailed SKU naming approach.
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How Is It Different From UPC?
So you now know what is SKU in inventory management. But how is it different from UPC?
Universal Product Code (UPC) is a type of barcode that companies use worldwide for tracking items in stores. It consists of 12 digits, as well as a barcode. Each trade item has a unique UPC that does not change and remains the same throughout every store.
The main difference between UPC and SKU is that UPC is universal. As for SKUs, companies use them only internally. This means that every company recognizes UPCs but not every company can recognize the SKU of another’s company. Also, UPCs are generated through a universal system, called GS1, while SKUs are created inside every company.
Another difference is that a UPC is permanent when assigned to an item, whereas SKU is not. While it’s inconvenient to change SKUs and time-consuming, it is possible and can be done multiple times. Additionally, SKUs can consist of both alphabetic and numeric characters and may be accompanied by a barcode. UPCs contain only numeric characters and are always printed as a barcode. Moreover, a UPC always consists of 12 digits while an SKU can range somewhere between 8 to 32 characters, more or less. Lastly, SKUs can be used for products and services whereas UPCs can be used only for products.
How Are SKUs Different From Barcodes, Batch Numbers, and Serial Numbers?
A barcode is a visually generated and scannable form of data, linked to a certain product or order. Barcodes are also used as identifiers by all kinds of businesses. SKUs can have also a barcode alongside the code, therefore having also a visual and scannable format.
Batch Numbers are codes associated with batches of products. They allow you to track the date in which your goods have come in and the order by which goods should be sold or used first. While items with the same parameters will have the same SKU, it is not based on the date they arrived or on an expiration date.
Serial numbers are unique strings of numbers and letters used to identify an individual piece of hardware or software, as well as other things. The purpose is to track the ownership and warranty information. On the other hand, SKUs allow retailers to keep track of each individual item of stock. For example, phones with the same parameters will have the same SKUs but different serial numbers.
Tips On Creating an SKU System
Now that you have a full understanding of what is SKU in inventory management you need to take some things into consideration when creating an SKU system. While creating an SKU might seem easy, it requires more time and effort than expected. Here are some tips to keep in mind when creating an SKU system:
- Come up with a plan. Before you begin assigning SKUs you need to come up with a plan. What are the parameters you will use? How many characters an SKU will have? What will be the shortcut for every parameter? Ensure to take into consideration every product you have.
- Do not use manufacturer’s SKUs. It might be tempting to use the manufacturer’s SKU system but that isn’t a good idea. Since every company is different, using a customized SKU system is important to cater to the needs of every company. Additionally, every manufacturer has a different system for SKUs which can confuse you and your employees. That’s especially true since manufacturers may change their SKU naming.
- Ensure they are easily read and understood by every employee. While you can use random numbers and letters to create SKUs, your employees won’t probably understand them. This will make it especially hard for new additions to your team.
- Do Not Change SKUs. It is possible to change your SKU system but it can get complicated, take a long time and create errors. Unless you have a very good reason and you know what you’re doing, do not attempt to change SKUs after implementing them. If you must make changes, you can phase off the undesirable SKUs and start using new ones in their place.
Tips On Creating SKUs
- Start with the most important attributes. Some parameters are more important and they should be placed at the beginning of the SKU. For example, you should start with the brand of an item rather than the size.
- Don’t use letters that look like numbers. Some letters and numbers look alike, such as the letter “O” and zero. This sometimes may confuse your employees, therefore more mistakes might happen.
- Do not begin with a zero. Some software might consider the value of zero as null (having no value) and therefore remove it.
- Use consistent SKUs. Ensure when creating an SKU system to keep the same length of characters.
- Avoid using special characters. While you can use special characters, it’s best to avoid them. Sometimes they can confuse people while also creating problems with the software.
- Avoid using spaces. Many software tools struggle to understand spaces. It’s better to use a hyphen (-) or underscore ( _ ) instead if necessary.
- Stay within 8-12 characters. While you can use more characters, it’s best to keep SKUs short so as not to overcomplicate them.
- Allow for growth. Make sure you leave room to grow your product base – it doesn’t really cost you anything to set your SKUs to follow this structure JS-BK-00001 to JS-BK-99999 – which allows for 100K products compared to just 1000 if you were to go with JS-BK-001 to JS-BK-999. Also, that way in the future you can introduce subcategories like JS-BK-01001 to JS-BK-09001.
To sum up, what is SKU in inventory management? It is a unique identifier for products based on different attributes that consists usually of 8 to 32 alphanumeric characters. SKUs are used in inventory management and they are different from UPCs, barcodes, batch numbers, and serial numbers. By using SKUs it is significantly easier to locate and differentiate the products. They also simplify the picking and packing process as well as reduce human errors. When creating an SKU system, you need to ensure to follow a few tips, if you want it to be implemented successfully.
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Klaudia Brudnowska is a Digital Marketer at Megaventory, a company that provides cloud-based software for inventory management. She is creative, enjoys creating content, and aspires to learn about new digital marketing techniques.