All You Need to Know About SKUs and Inventory Management

Inventory management is a fundamental part of successfully running a business selling products, goods or merchandise. The inventory indicates how many products you have available to sell, and which products need to have stocks replenished. With good inventory management, your business will have a ready supply of products that are most in demand, increasing customer satisfaction. Poor management and you might end up with many products out of stock, disappointing and discouraging customers.

A popular technique to keep track of inventory is to use SKUs or Stock Keeping Units. Generally used by retailers and manufacturers, SKUs can be by business that are small, big or any size in between. SKUs are also useful for eCommerce setups, and are great at monitoring inventory for multiple sale points, offline and online.

By learning more about SKUs, you can exploit their full potential and optimise your inventory management.

What are SKUs?

An SKU is a code given by a business to each unique product or product type, helping to automatically keep track of movement of inventory. The SKU is often found above the barcode and consists of a combination of 8-12 alphanumeric characters. When the barcode is scanned, the SKU code is also scanned.

The SKUs can be customised to include information such as product type, supplier, store location, department, variation, size, and colour. Simple SKUs can be decoded manually, in case employees need to identify products without access to a scanner. As the SKU is a complete and accurate description of any particular product, it can replace lengthy product descriptions.

Although SKUs are generally applied to tangible products and goods, they may also be assigned to other billable services, repair time units or warranties. They can be used by retail stores, warehouses, service providers, eCommerce vendors, catalogues and product fulfilment centres to track inventory.

Role of SKUs in Inventory Management

SKUs accurately describe each individual product, making them a vital part of inventory management. By assigning each product an SKU, and scanning the incoming inventory and sales, businesses can keep track of the products that need to be re-stocked and with which frequency. They also help in identifying any losses in the stock movement cycle, reducing risk of theft and unaccounted items.

Each SKU will often follow a similar pattern, in terms of listing the category, size, colour and other details. This helps in managing the inventory for the overall product category, and identifying which specific products within the category need to be ordered. As each product has a unique code, you can gain deeper insight into the products that are more successful.

For large businesses especially, having an SKU system reduces errors in inventory management, while saving time and effort.

SKUs Vs UPC

Another product identification code that is printed close to the barcode is the Universal Product Code (UPCs). It is a 12-digit number that can be read by any barcode scanner anywhere in the world. The UPC code is unique for each product but common for all businesses.

In comparison to SKUs, the UPC is located below the vertical stripes of the barcode while the SKU is above the barcode stripes. SKUs can be customised by each individual business, but the UPCs are made only once, by the manufacturer. UPCs typically consist of numbers, whereas SKUs are alphanumeric.

SKUs and UPCs are similar as they are both product identifiers, but their purpose is different. While UPCs are used by manufacturers for identifying products, SKUs are used by businesses internally to aid in inventory management, analytics, and sales.

Electronics and other expensive products will also have an additional serial number unique to that specific product. The serial number is used to keep track of the ownership and history of the product.

How to Generate SKUs

SKUs are used internally, within the business and so you have utmost flexibility in how you want to generate and name SKUs. There is free software available to generate SKUs, or if you have an inventory or retail management system already, it may have an option to generate SKUs.

• Unlike other forms of identification, SKUs should be far from random, and be easy enough for employees to remember if need be. For example, cashiers may remember the SKUs for popular products to speed up checkouts.
• Choose whether you want numbers only or an alphanumeric code. Including alphabets will make the code easier to understand, but numbers will make the SKU more confidential in front of customers.
• Decide on how long you want the SKUs to be and what information you want to include. Most SKUs are of 8 characters for easier understanding by can be extended to 12 characters.
• The type of information would depend on the particular business niche. For example, in a general garment retail shop you may want to include a category for men’s/women’s clothing, while in a specialised women’s boutique, there would be no need for that category.
• Allocate 2-3 characters for each category and sub-category, and at least 1-2 characters as the unique identifier for the product. If you are using alphabets, try to use letters that can clearly indicate the connected category. For example, M for menswear and W for womenswear.
• When formulating SKUs consider how many warehouses and storefronts will be involved. If there are multiple store fronts, then you can add on a digit or an alphabet to indicate which location the product is going to or coming from. This will help in overall clarity and in having a cohesive inventory management setup.

Overall, it is ideal to personalise SKUs to suit your specific business needs, and how the SKUs are expected to be read. Once you have all the relevant SKUs listed, they can be combined with traditional barcodes and printed with a barcode scanner to attach on to the products.

SKUs and eCommerce

Originally, the concept of SKUs evolved for applications in offline stores and retailers. However, with the prevalence of eCommerce, SKUs are now widely used to identify products for eCommerce sites. As there is a physical inventory behind each eCommerce website, SKUs are useful in inventory management. They help track sales of products and aid in identifying how soon products should be re-stocked.

Apart from inventory management, SKUs can help improve the customer experience for eCommerce sites. When a customer views a particular product, the SKU can help identify similar products and automatically suggest them to the customer. This saves massive time and effort for the business, by not having to create related product recommendations for each product. An eCommerce site can be programmed to recommend similar products, related sizes, colour options and more.

Whether you have an eCommerce site or are planning to launch an eCommerce portal for a physical store, SKUs are a time investment that is well worth the effort.

Benefits of SKUs

There are numerous benefits of SKUs that make them an important part of a smoothly functioning business.

• Accurate Inventory

Finding the right balance is important when it comes to inventory. Its not good to have too much stock, especially if the products can expire or go out of style. On the other hand, having too little of in demand products is also detrimental.

When you have a large volume of transactions and orders, accurately managing inventory can be challenging. SKUs are an excellent solution to inventory tracking problems. With unique SKUs you can have an instant overview of what products you have, which ones you are running low on and what needs to be replenished.

• Inventory Management Across Multiple Stores

Business growth and expansion is the dream of all entrepreneurs, and a major means of expansion is to set up multiple store fronts and/or an eCommerce site. When the physical storage locations increase, managing inventory becomes more challenging. Not only do you have to track what products you have in stock, you also need to know where those products are located.

SKUs are an excellent way to keep track of the current and past locations of products. Depending upon demand, the products can the moved around between locations, offering you greater flexibility and control.

• Accountability

Accountability is important for businesses, especially those dealing with large-value small size products. With the aid of SKUs, you can avoid having products being unaccounted for, or simply ‘going missing’. The SKUs help keep track of each product, from the point of purchase to sale.

By keeping track of each individual product, you have greater financial clarity. Expenses and earnings can easily be tracked by monitoring the SKUs, and which products are selling more. At any given point of time, you can know what products are currently in warehouses, or in shops, or have already been sold.

• Better Customer Service & Experience

Although SKUs may seem to be connected primarily with inventory management, they also help boost customer service in several ways. With SKUs, you can know and keep track of popular products, making sure they are in stock for customers.

Carefully structured SKUs also make it easier for you to suggest related products for customers. From the SKUs, you can also identify additional products that you may want to stock in the future. The data from SKUs and sales are useful in customer relationship management, where you can customise deals or loyalty offers for customers based on their previous purchase history identified by SKUs.

SKU Tips

Here are some tips on creating and using SKUs:

1. Never start an SKU with the number zero as it can be interpreted by systems as a blank. This can result in the SKU being read by the second number/alphabet by some systems, and in others showing the zero as the first character. A discrepancy in the SKUs makes effective management and tracking a challenge.

2. Avoid using letters that resemble numbers as this can cause confusion when the SKU is read. For example, in some fonts a lowercase letter ‘L’ resembles the number 1 and also a capital ‘I’.

3. Use a consistent pattern of SKUs throughout the business, or at least for different categories of products. This helps employees in reading the SKUs when required, and makes it easier to add new products to an existing SKU structure.

4. Always start from the highest or broadest category for the first few digits and move towards more specific particulars. By starting with the higher categories, you can easily add on more sub-categories and products without disturbing the general structure.

5. Try starting the SKU with letters, so that it becomes easy to differentiate and identify where the SKU code is starting. In complex spreadsheets, or when written along with other codes, it can be tricky to find exactly where the SKU begins. Using letters in the start is a great visual cue.

6. Avoid using any of the manufacturer codes within the SKU. As the manufacturer code will likely still be on the barcode in the form of the Universal Product Code, having a similar SKU can be confusing. Since you have the option of personalising the SKU, make the best of it and create a unique SKU that suits you.

7. Avoid having very long SKUs that are more likely to create confusion. Although the maximum recommended number of characters for an SKU is 12, it is ideal to use around 8 characters. Having a shorter SKU is easier to name, maintain, and identify.

Conclusion

SKUs are an immensely useful tool for any business, and offer great potential. With a carefully planned structure, you can manage unlimited products effectively. Inventory management can be streamlined with the use of SKUs, whether you have a physical store or an eCommerce business, or both.

As SKUs are fully customisable, they can be adapted for any niche and industry. They can help you keep track of individual products, and the overall flow of products. Accordingly, you can avoid having shortages of highly demanded products by ordering extra stock as and when needed. For maximum efficiency, integrate the SKUs with a point-of-sale system.

At POS Plaza, we can help you find the best POS solutions for your business needs, including POS hardware components, software and general setup. Reach out to us today for guidance in how to make the best use out of a POS system within your budget.