What Are Stock Keeping Units (SKUs) and How to Manage Them?

A stock keeping unit (SKU) is a specific type of product in a company’s inventory that is marked with a unique SKU code. Using SKU codes for inventory tracking allows you to avoid stockouts and overstocking, ensure effective picking and dispatch, and track inventory performance related KPIs.

What is a Stock Keeping Unit (SKU)?

A Stock Keeping Unit or an SKU is a distinct item in a company’s inventory that is marked with a unique SKU code used to track the stock levels and movements of the item. An SKU can be a physical item, a service, or a mix of both. Each SKU has to be unique, however, which means that two different stock keeping units are always distinguished from one another by some attribute, such as color, size, weight, material, etc.

For example, if a furniture manufacturing company makes and sells the same basic table in three different finishes, each of those three variants should have a distinct SKU code within the company’s inventory management system. Or if a t-shirt maker sells a t-shirt in various sizes and colors, all of these combinations would ideally have their own SKU codes.

While distributors and retailers only deal with finished products, manufacturers also have to assign SKU codes to the materials and components used in production.

In electronics manufacturing, the term ‘model number’ is often used interchangeably with SKU code.

Stock keeping unit codes typically consist of an alphanumeric code consisting of letters, numbers, and symbols that represent various attributes of the product, such as color, size, style, etc. For example, the SKU codes of a wooden table made in two finishes, 1) flaxseed oil and 2) varnish, could be:

1. WT-FLO
2. WT-VAR

As SKU codes are mostly for internal use only, there are no universal standards, meaning that companies have the liberty to develop their own code systems.

Developing an SKU system, however, is the first step to effective inventory management, whether you are a manufacturer, a distributor, a physical retail store, or whether you have an online store on Amazon, Shopify, or any other e-commerce platform. 

Why are SKUs important?

A stock keeping unit system is the basis for proper inventory management in both large enterprises and small businesses. Depending on whether you manufacture your own products or sell goods produced by another company, SKUs may be crucial for the following aspects of your operation:

1. Inventory management. SKU codes help businesses to know exactly how much of a specific product or its variant they have in stock, when they need to restock, and whether there is shrinkage that requires their attention. Manufacturers also use SKU codes to track the movements and inventory levels of components and materials used in the manufacturing process, allowing them to accurately forecast material demand and calculate material requirements.
2. Item identification. SKU codes are essential for identifying products throughout the supply chain, from picking to the POS system, and making sure that customers receive the correct items. SKU codes also allow manufacturers to make sure that the right components are used in production, especially in situations where some components look indistinguishable from one another.
3. KPI tracking. Using SKU numbers for inventory tracking allows you to also track various metrics regarding the performance of your items. This includes inventory levels, turnover rates, sales performance, defect rates, production run times, etc. All of these data outputs enable you to make well-informed business decisions, e.g. when pricing your products or performing SKU rationalization.
4. Production planning. By tracking inventory and production data via SKU codes, manufacturers can create accurate production plans to respond to forecasted demand and adjust existing plans when actual demand differs from the forecasts.

As we can see, an SKU system forms the basis for performing many vital functions within all companies dealing with physical goods, from manufacturers and product fulfillment centers to e-commerce businesses and retailers with in-store shopping.

SKU vs. UPC codes

A UPC or a universal product code is a unique identifier standard used globally to identify and track products, mainly at their point of sale such as a retail store checkout. A UPC consists of a series of vertical bars and varying width spaces that represent a unique 12-digit numerical code. The UPC is one of the most widely used barcodes in the world. 

The first six digits of the code are used to identify the manufacturer of the product while the next five represent the product itself. The last digit acts as a verification key that is used to determine the accuracy of the code.

Although companies use SKUs and UPCs both to identify and track inventory, they differ in several essential ways:

1. Standardization. UPC is a universal standard, SKU is not.
2. Point of use. SKUs are for internal use in the company that assigns the codes. UPC codes are assigned by the manufacturer and they are used throughout the product’s supply chain.
3. Contents. SKU codes usually combine letters, numbers, and symbols (generally only dashes are used) that provide information about the product. UPC codes only consist of numbers and cannot be deciphered without a barcode system.

Similar to the UPC is the EAN (European Article Number), another universal barcode system. The EAN, however, consists of 13 digits, of which the first three designate the country where the product was registered while the next eight numbers represent the manufacturer and the product itself. The last number in the EAN is also used for code verification.

While UPCs are primarily used in North America, EANs are used in Europe and other regions of the world. Many manufacturers today use both barcode systems to make sure their products can be tracked across markets.

SKU codes vs. serial numbers

Another concept similar to stock keeping unit codes is serial numbers. Serial numbers are unique codes assigned to individual units by the manufacturer. Just as SKU codes and UPCs, serial numbers are used to identify and track inventory throughout the supply chain.

Some of the main differences between SKU codes and serial numbers are: 

• The same identical SKU codes and UPCs are assigned to each unit of a specific product while a unique serial number is assigned to each unit separately.
• SKU codes are used for internal tracking within the company managing the inventory. Serial numbers are used to track goods throughout the supply chain.
• In addition to inventory management, serial numbers are used for returns management and quality control.

For example, a computer manufacturer can build thousands of identical laptops with the same specifications and assign unique serial numbers to each of them. The laptops find their way through the supply chain to a retailer and then to the customer. If the customer experiences a problem with the laptop, the serial number is used to determine whether this specific unit is eligible for return or repair. If the manufacturer understands that several units in a certain serial number range have the same issues, they can determine the root cause of the problem and prevent it from happening in the future.

Creating an SKU system

The basic tenet of an effective stock keeping unit system is that every SKU code should be unique and specific. Avoid using weird symbols, accents, or special characters usable in just one language. Remember that the code system has to clearly communicate the attributes of the item. This means that they should describe the SKU and say nothing about location, production shift, or any other extrinsic variable. If you manage different distribution centers or warehouses, make sure your SKU codes are the same across facilities. You might move your stocks or close a center one day, but the items will keep the same attributes.

Remember to always consider an SKU code system following the most important attributes. Reduce as much as possible the number of digits and keep the same amount of digits for all SKUs if possible. Use a pyramidal system using alphanumerical digits going from general to detail. It also helps users to recognize the SKUs immediately. For example, a sports distribution center may use the code SRB-40US to define:

S: Sneakers

R: Running shoes

B: Blue color

40US: size 40 US

If you are a distributor or a retailer, use brand or industry in the code system only when necessary, since they are not exclusive and one day the items can be replaced by others.

Predict future growth and expansion in the code system by leaving letters and numbers for the future. In addition, train your staff on how to use the system. Within a short period of time, the users will get familiarized with the system and know many SKU codes by heart.

Easily create SKU codes with our free SKU generator.

Using inventory software for SKU management

Although Excel and other spreadsheet solutions are widely used to manage inventories, at some point, they become an impediment to the effective tracking of your goods. If you encounter any of the following issues, it is time to implement dedicated inventory management software:

1. Inaccurate inventory counts. When you perform physical stocktakes, the numbers are different than what you have in the spreadsheets.
2. Frequent stockouts and overstocking. When you unexpectedly run out of your key products or when you stock many times more products than you actually need.
3. Time-consuming manual processes. When you spend too much time on data entry, reporting, and inventory calculations.
4. Lack of visibility and traceability. You do not know what and how much you have in stock, how much you have sold, where a particular product came from, or which material lots were used in producing it.
5. Growing business. If you foresee growing volumes in the future, implementing inventory management software could help you scale more efficiently.

Dedicated inventory management software can easily help you avoid these issues and make sure your company is scaleable when you expect growth. Here are some of the primary ways it could help your company manage stock keeping units:

1. Automated inventory tracking. Inventory management software automatically updates your inventory levels whenever a sale is made or whenever materials or products are booked. It also shows you where your items are located and creates a data trail that allows you to see which stock lot the items came from, which employees handled them, and which customers received them.
2. Automated KPI tracking. Inventory software is capable of collecting and processing huge amounts of data, providing you with easily understandable performance metrics related to your SKUs.
3. Inventory control mechanisms. These digital systems also allow you to set reorder points and safety stocks for your SKUs, provide you with data needed to create accurate demand forecasts, and send you notifications whenever stock levels reach a critical level.
4. Barcode integration. Many inventory management solutions also have barcoding capacity built into the software, allowing you to automatically generate barcodes for your SKUs and effortlessly scan items to feed data into your inventory system. This enables you to significantly reduce the time spent on manual data entry.
5. Third-party integrations. Many modern inventory management solutions offer integrations with various useful third-party apps that allow you to synchronize data between the solutions. This way, you can make use of powerful CRM solutions, e-commerce platforms, fulfillment apps, and accounting tools, and have them sync up with your central inventory management software.

If you are a manufacturer, you should rather look toward MRP software as these systems provide you with functionality specific to your needs, including production planning and scheduling, materials and WIP management, and manufacturing KPI tracking apart from inventory management.

Key takeaways

• A Stock Keeping Unit or an SKU is a distinct item in a company’s inventory that is marked with a unique SKU code.
• SKUs are used as a basis for inventory management, to track the stock levels and movements of inventory items.
• Using SKUs helps companies avoid stockouts and overstocking, identify products more easily, ensure effective production planning, and track inventory-related performance metrics.
• SKU codes should not be conflated with UPC/EAN barcodes as well as with serial numbers.
• The SKU code system has to clearly communicate the attributes of the item, for example, a blue pair of US size 40 sneakers for running could have the SKU code SRB-40US.
• It is highly recommended to use dedicated inventory management software to manage your SKUs instead of a spreadsheet-based system.

Frequently asked questions

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