Stock Keeping Unit (SKU)

What Does SKU Mean?

At a basic level, the acronym SKU stands for Stock Keeping Unit. An SKU is a barcode or alphanumeric code designated to individual items within your inventory to help you keep track of your total stock, measure that product’s sales performance, help you design a physical store layout, and make for a smoother experience between customers and employees.

How a Stock Keeping Unit Works

In order for Stock Keeping Units to work, retailers will have to come up with certain classifications and identifiers for different parts of their inventory.

For example, let’s say your business sells different types of musical instruments. In order to keep track of guitar sales, you’ll assign the letter G. But to get more specific, like assigning a code for an acoustic guitar, you’ll assign the code G1 while electric guitars are assigned a code like G2. Then you’ll want to get even more specific so you’ll assign another code for the color of the acoustic guitars. The color identifier will use the letter C with a number associated next to it to identify the specific color like C2 or C3. Another numerical code will need to be assigned to identify if it is a steel-string guitar or nylon string guitar.

Other factors such as the brand or manufacturer along with the size of the guitar can also be taken into account but for this example, we’ll keep it a little simpler.

Product Category Code Color of Item Code Steel/Nylon String Code SKU
Guitar G1 Black C1 Steel 101 G1C1101
Guitar G1 Red C2 Steel 101 G1C2101
Guitar G1 Brown C3 Nylon 102 G1C3102
Guitar G1 White C4 Nylon 102 G1C4102
Guitar G1 Blue C5 Steel 101 G1C5101

Once you’ve developed a specific SKU for each item, you’ll be able to input those codes into an inventory management software and a Point of Sale (POS) system to help keep track of your total inventory.

From there, retailers can look at their business from a birds-eye view to see which specific products are generating the most or the least amount of sales, which products need to be reordered, which products are selling where, and make other data-driven decisions.

What Are SKUs Used For

SKUs are used at a number of different points within your business’s operations. Some of the top reasons include

  • Business analysis: Figure out your strongest and weakest products in terms of sales volume.
  • Manage inventory better: Know exactly when to replenish your inventory by keeping track of turnover and flow.
  • Help your customer service team: Give them a better tool for locating specific products that customers may be asking for.
  • Recommend products easier: By seeing the SKU’s that your customers have bought, you can then recommend products that are in the same category and/or share similar parts of the original SKU code.

SKU vs. UPC Codes

While SKUs and UPCs may look similar at first glance, they are actually quite different.

For starters, SKUs are intended for internal use only and can be any length but is often 8-12 characters. They are free to create and help you identify your own products against each other. Because of this, SKUs are unique to each retailer. Also, SKUs use letters along with numbers within their codes and may or may not come with a bar code.

UPC codes, on the other hand, are not created internally and are instead purchased from GS1 US. This is a non-profit organization whose purpose is to maintain global business standards. This code is always 12 digits long and is intended for external use as it allows for accurate tracking as the item moves through the supply chain. The number is the same across retailers and is printed as a scannable barcode.

In essence, SKUs are intended to help you identify your own items while UPCs are intended for others to identify your items. They are not mutually exclusive as businesses almost always use both when selling in retail environments.

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