What is a SKU number? How you can use it for inventory management

SKUs in business: How they’re used

Using a structured system, SKUs encode key details about individual products. In day-to-day operations and inventory management, they serve several important functions:

1. Inventory tracking: When you sell, scan, or restock an item, the SKU updates your business’s data.
2. Product organization: SKUs help you search for and find items in warehouses, retail stores, or e-commerce systems.
3. Data analysis: Your business can run reports by SKU to see which specific colors, sizes, or styles sell best.
4. Error prevention: With each item tagged uniquely, SKUs reduce confusion between similar-looking products.

SKU examples

Businesses assign SKU codes to items and determine what data they should represent. For example, a shoe store might organize SKUs using the following data:

• Department (Men’s, Women’s, Kids, etc.)
• Type (Fashion, Running, Hiking, etc.)
• Color (Red, White, Green, etc.)
• Size (8, 9, 10.5, etc.)
• Model year (2023, 2022, 2021, etc.)

Using this system, a business may assign the SKU MEN-TN-WH-8-25 to a 2025 Men’s Size 8 tennis shoe in white.

SKU vs. UPC vs. serial number

For businesses that manage stock internally or track stock externally, SKUs, Universal Product Codes (UPCs), and serial numbers are similar, but they all serve different purposes.

• SKU vs. UPC: SKUs help internally manage stock, while UPCs are recognized globally and used for external tracking throughout the supply chain.
• SKU vs. serial number: Serial numbers are unique identifiers assigned to every copy of a product, helping support warranty management, theft prevention, and recall effectiveness.

Not all products warrant a serial number. Businesses commonly use them for high-value items or those requiring stringent tracking, such as electronics, automobiles, and luxury goods.

The benefits of using SKUs

SKUs can help make day-to-day operations smoother and give your business a clearer view of what’s driving sales. When used well, they can also provide important benefits for inventory management.

Streamline operations

With SKUs, you can organize and categorize products into different sizes, colors, and varieties. This organization helps workers find the products they need to fulfill orders, leading to a more organized warehouse and sales floor. This helps:

• Decrease fulfillment errors and mistakes, like shipping the wrong size or color of a product.
• Speed up fulfillment times as products categorized by SKUs are easier to locate, pick, and pack, speeding up the fulfillment process.
• Keep inventory management software updated, ensuring product availability when the customer clicks the “buy” button.
• Optimize supply chain forecasting based on what types and variations of products sell fastest.

Improve inventory management

Typically, you can closely monitor product variations with SKUs. With precise information on which items are selling and which aren’t, businesses can:

• Prevent overstocking and understocking, aligning stock more accurately with consumer demand.
• Optimize warehouse space by decluttering aisles, organizing products effectively, and maximizing storage layouts.
• Improve supplier negotiations, allowing businesses to negotiate terms based on actual sales data and inventory needs.
• Forecast sales demand using insights from product performance, seasonal trends, and other real-time factors.

Make smarter business decisions

SKUs act as a treasure trove of business performance analytics, revealing trends, seasonal fluctuations, and consumer preferences. With updated business performance data, you can:

• Make strategic decisions that drive profitability, like targeted promotions that boost sales of specific products or categories.
• Adjust pricing and avoid dead stock by identifying slow-moving items and seasonal sellers.
• Improve customer experiences by consistently stocking products, offering faster service and answers to questions, and providing personalized product suggestions based on prior purchases.
• Identify upsell and cross-sell opportunities using product and data analysis that identifies natural product pairings and opportunities to promote premium products.

How to create SKU numbers

There are two ways to create SKUs: Manually or using a SKU generator. Your inventory management software may provide a generator, but these can also be found online. When creating SKUs, it’s important to think logically and follow practices like:

• Using the first 2-3 characters as a top-level identifier
• Making characters 4-8 indicate product traits, like color, size, or subcategory
• Ending with a sequential number for tracking product versions

Manual vs. automated SKU management

How you manage SKUs can impact efficiency and accuracy. For some companies, manual systems may be the correct choice for keeping tabs on smaller stock numbers, while others may choose to invest in automated tools. Each approach has its own advantages and trade-offs.

Manual SKU management

A manual SKU management system involves tracking inventory with spreadsheets, paper logs, or basic point-of-sale entries. This approach is typically low-cost and can offer your business greater control over how you record and store product information.

However, manual SKU management can also be time-consuming and more prone to human error. For small businesses with limited inventory, this system can be effective and manageable.

Automated SKU management

Automated SKU management uses digital software to track and update SKUs. These tools sync sales, restocks, and location data, which often improves tracking accuracy and scalability as product lines expand.

Automated systems may require upfront investment in addition to ongoing training and maintenance costs. However, automated management may offer stronger support for complex inventory systems than traditional management.

SKU management best practices

The process of assigning and managing SKU numbers may seem straightforward, but efficient management requires you to follow a set of good practices:

• Keep it unique and consistent: Maintaining a consistent format (e.g., length or use of letters/numbers) can improve scanning and data management, while unique SKUs may reduce confusion.
• Use logical hierarchy: Avoid overly complex codes that use an illogical hierarchy or switch when certain rules are followed.
• Define popular product features: Use your SKUs to highlight product traits and features to increase their uniqueness.
• Train your staff: Don’t leave your team in the dark, but train new employees and current staffers on what your codes stand for and how to read them.
• Avoid zeros and special characters: Beginning SKU numbers with "0" or using characters like “/” or “&” can lead to confusion in certain software systems.
• Review and update regularly: Make sure your SKUs match your company’s needs by regularly reviewing the system and making adjustments.