Stock keeping unit (SKU) explained: Tips, benefits & more

Running a business is always exciting, especially when you see orders coming in.

However, managing a warehouse and keeping track of inventory can quickly become a stressful, never-ending cycle of handling new stock, processing orders, and dealing with returns. 

It can feel so overwhelming that making changes often gets pushed to the back burner.

However, implementing SKU (stock keeping unit) numbers for inventory management is one change that can set a strong foundation for your business, boost efficiency, and support growth.

This article thoroughly guides you on everything you need to know about SKUs.

Let’s dive in!

What is a stock keeping unit (SKU)?

An SKU, or stock-keeping unit, is a unique code that helps you keep tabs on your inventory. It’s made up of letters and numbers and usually comes with a barcode that you can scan right off the product label. 

This code isn't just random—it tells you everything you need to know about a product, like its price, details, manufacturer, and where it was sold.

But SKUs aren't just for physical products; they can also be used for services, like tracking repair hours at an auto shop or managing warranties.

Unlike other product codes like ISBN or EAN, SKUs are unique to your business.

You can customize them to suit your needs, making it easier to keep track of inventory while also catering to your vendors and customers.

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A similar type of product code used in international trade is the HSN code. Learn everything about HSN codes and why they are crucial for your business.

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What is the purpose of SKU?

SKU numbers play a big role in keeping your business running smoothly:

1. Inventory management: SKUs help you keep track of your stock, so you always know when it’s time to reorder and avoid the hassle of overstocking or running out of products.

2. Sales tracking: By giving each product a unique SKU, you can easily see what’s selling well and what’s not, making it easier to decide what to buy more of.

3. Customer service: SKUs make it a breeze to find products quickly, which means you can speed up order fulfillment and reduce mistakes, keeping your customers happy.

4. Data analysis: With SKUs, you can dive into detailed sales data, spot trends, predict what’s going to be in demand, and fine-tune your product lineup.

5. E-commerce integration: If you’re running an online store, SKUs are key to keeping your inventory in sync across all your platforms, ensuring everything is accurate and up-to-date.

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How to create SKU numbers for your business?

Creating SKU numbers is a lot more effective when you follow a systematic approach rather than just randomly generating letters and numbers.

When these are designed to describe a product, they become much easier to use and manage. 

Here’s a simple way to think about SKUs:

• Manufacturer: Who made the product?
• Product name: What is it called?
• Model: Does it have a specific model number?
• Size: What size is it?
• Color: What color is it?
• Material: What is it made from?
• Other attributes: Any other special features?

1. Start with the main identifier

The first part of your SKU should represent the most important feature of the product.

This could be a category, department, or brand.

For example, if you’re selling apparel, the first few letters might represent the item type (e.g., "TS" for T-shirts, "PN" for pants).

2. Add a unique identifier

The next section of your SKU should include unique attributes such as color, size, or material.

This helps differentiate similar items within the same category.

For example, you might use "BLK" for black, "M" for medium, or "COT" for cotton.

3. Incorporate additional identifiers

Finally, add any additional details that can help further distinguish the product.

This might include a sequential number for tracking inventory age or other specific characteristics like fit type or design.

For instance, you might use "001" for the first batch of a product or "SLIM" for slim fit.

4. Combine the elements

Now that you have your components, combine them to create a full SKU.

Ensure that its easy to read and logical. Typically, you should go from the most general to the most specific features.

5. Establish a consistent naming convention

It’s crucial to maintain consistency across all your SKUs.

This means sticking to the same order and format for all products, which will make it easier for anyone in your organization to understand and use the SKUs.

Let's combine the above details to make an SKU:

T-Shirt: TS-BLK-COT-M-001

Explanation:

• TS (Main Identifier - T-Shirt)
• BLK (Unique Identifier - Black color)
• COT (Unique Identifier - Cotton material)
• M (Unique Identifier - Medium size)
• 001 (Additional Identifier - Batch number)

6. Add SKUs to the inventory management system

The simplest way to create SKU numbers is by using an inventory management system (IMS) or a POS system.

These software tools not only track customer orders and stock levels but often include a feature that automatically generates SKU codes. 

This means that every product you enter into the system will be given its own unique SKU, making inventory management a breeze.

5 tips for creating and managing SKU numbers

Managing SKUs well is essential for keeping your inventory organized and making informed business decisions.

Here are some tips to help you create, track, and update your SKUs:

1. Maintain consistency

Ensure all your SKUs follow the same pattern throughout your product range.

A consistent format makes it easier to manage and understand your SKU inventory.

2. Skip zeros and special symbols

Zeros can cause confusion—they might be ignored by some software or mistaken for the letter "O." Similarly, special symbols like !, @, or & might not work well with certain systems.

Stick to using just letters and numbers.

3. Emphasize key product features

Use SKUs to highlight the features that make your products stand out.

For example, in fashion retail, you might notice specific colors or sizes that are more popular.

By including these details in your SKUs, you can better track customer preferences and adjust your inventory to meet demand.

4. Regularly refresh your SKUs

As your product line evolves, your SKUs should too.

Update SKUs when you add new items or remove older ones to keep everything current.

5. Monitor SKU effectiveness

Keep an eye on how each SKU is performing.

This can help you identify which products are in high demand and which might need to be reconsidered.

By tracking this information, you can track Days Inventory Outstanding and plan your inventory strategies.

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Learn how invoice financing can help you overcome challenges in inventory management.

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Benefits of using SKUs in inventory management

When it comes to managing your inventory, few things are as crucial as SKUs. Here's why they matter so much:

1. Streamlines your ordering process

Using SKUs when placing orders with suppliers makes it easier to get exactly what you need.

If your inventory system is connected to your suppliers' systems, SKUs become essential for smooth communication. 

2. Simplifies e-commerce and multichannel selling

SKUs really shine when you integrate different software systems.

For example, if your e-commerce platform is connected to your order management system, SKUs ensure that each product—no matter its variations—is identified correctly.

This means the right product gets shipped to the right customer, every time.

3. Keeps inventory updated

When you adjust the stock level of a product in your main inventory, all other systems need to reflect that change.

SKUs make it easy to automate these updates, so your inventory numbers are accurate across the board.

4. Speeds up business sales

Business customers often refer to SKUs or part numbers when placing orders. This not only speeds up the process but also helps minimize errors.

This is especially important for managing seasonal inventory, where accuracy and quick reordering are crucial for keeping up with demand.

5. Handles different terminology across systems

Sometimes, the same SKU might have slightly different details depending on where you’re selling it.

For example, a large red t-shirt might be described differently across various sales channels. 

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Along with handling SKUs, building strong supplier relationships is key to efficient inventory management. Discover key strategies for improving your relationships in international trade.

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What is the difference between SKU and UPC?

When you're running a store, you'll often hear about product codes like SKUs and UPCs.

Both are used to track items, but they serve different purposes.

Where it’s used

SKUs are used internally within a specific store to manage inventory, while UPCs (Universal Product Codes) are universally recognized across multiple stores and supply chains for consistent product identification.

Length

SKUs typically range from 8 to 12 characters, whereas UPCs are always 12 digits long.

What it does

An SKU identifies specific product traits like size and color, while a UPC consists of six digits for the manufacturer, five for the item number, and one check digit for security.

Type of code

SKUs can include both letters and numbers for customization, while UPCs are strictly numerical and follow a standardized format.

Who makes it

Retailers set up their own SKU systems, whereas UPCs are issued by the Global Standards Organization (GS1) to ensure global uniqueness.

WHat are other alternatives to SKUs?

Besides SKUs and UPCs, there are a couple of other codes used in retail:

1. Barcodes

Barcodes are the black lines you see on product labels, which are scanned during checkout —they often represent a UPC number and are used universally across different stores. 

Unlike SKUs, barcodes aren't unique to a single store but are assigned to a product regardless of where it’s sold.

Some retailers use both a barcode and an SKU on their labels for easier inventory management.

2. Serial numbers

Serial numbers are used by manufacturers to track individual units of a product. They’re particularly useful for warranty claims, repairs, and recalls.

Unlike SKUs, which are shared by all units of the same product, serial numbers are unique to each individual item. This makes them essential for tracking products on a unit-by-unit basis.

Turn inventory chaos into cashflow with Stenn

Keeping track of your inventory doesn’t have to be stressful. By using SKUs effectively, you're not just organizing your warehouse—you’re making your entire business run smoother and smarter. 

Whether you're using SKUs, UPCs, or barcodes, each one helps you stay on top of your stock and serve your customers better.

But, having a great system is only part of the equation. You also need to make sure your inventory is always ready to go when your customers are.

That’s where Stenn can help. Use our easy inventory financing to restock your products without worrying about future cashflow. 

Ready to keep your business growing? Check out Stenn's financing solutions and make sure you’re always prepared for what’s next.