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Running a business

Effective inventory management starts with SKUs

If your small business is growing, it’s a great time to think about how inventory management systems can help you as your grow your business, manage costs, and forecast sales. Im an alphanumeric Stock Keeping Unit (SKU) system is a good place to start.

What is an SKU (Stock Keeping Unit) system?

A stock-keeping unit (SKU) is a scannable bar code label that allows you to automatically track inventory levels and movement. These bar codes usually include between eight and 10 numbers and letters that serve as a unique identifier and correspond to the item’s product details, price, and manufacturer.

How can SKUs help me organise and manage inventory?

When you have an SKU system in place, you’ll be able to search and identify stock on hand from orders and invoices. You’ll also be able to track inventory movement right down to the individual variants of every product, such as colour, size and location.

With a good SKU system that defines your product right down to the minute details, you’ll always know where everything is, minimising opportunities for theft. In a warehouse filled with thousands of products, it’s easy for missing items to slip under the radar. But when individual SKUs only denote a small number of items, it becomes harder for items to disappear.

How can SKUs help me forecast sales?

Having an SKU system in place means you’ll have better visibility into your future inventory needs. You can use information about certain product SKUs to forecast sales trends and ensure you have just the right amount of inventory on hand as your business grows or encounters seasonal sales fluctuations.

Do take note that SKUs are only associated with stock on hand. Any products that you’ve ordered but are still in transit won’t yet have a SKU—only products that are on hand and ready to be sold.

Here are three best practices for setting up your SKU system:

How to create SKU numbers

You can create SKU numbers using our free SKU Code Generator to create your own SKUs. 

Examples of good SKUs: 

If you’re selling novelty coffee mugs and they come in three different colours, then the SKUs might look something like this:

Coffee Mug Red, model no.1 = CM01-R

Coffee Mug White, model no.1 = CM01-W

Coffee Mug blue, model no.1 = CM01-B

In the example, we have used the colour variant, which distinguishes the items, as the last value in the SKU. By suffixing the SKU with the variant, we make the SKU easy to comprehend while still grouping all the coffee mugs with CM01 for ease of use.

Make SKUs unique but understandable

The letters and numbers in SKUs should represent important product information. Don’t overcomplicate your system. Use letters for colours, size, type and seasonal variants in your products.

Try to avoid loading the numbers with a meaning (for example 1 is blue, 11 is teal, 12 is navy, etc.) because this will become a confusing string of numbers. If it’s too complicated you’ll need to have a legend on hand to decode the meaning of every SKU for each specific product.

For example, when creating an SKU for a blue dress, size small for Autumn/Winter ‘2021, isn’t AW21DrBS easier to understand than 15020101? In this example, the SKU number breaks down as:

AW = Autumn/Winter

21 = 2021 (year)

Dr = Dress

B = Blue

S = Small

2. Arrange attributes according to importance

Think about how you would describe your product in the order of its defining characteristics. Choosing to begin with the season/year will help you limit your searches to the right collection, followed by increasingly broader characteristics like product type, colour and size.

3. Avoid spaces, accepts, symbols, and letters that look like numbers

Using accents, symbols or letters that look like numbers can unintentionally confuse your inventory system, so stick to alphanumeric SKUs as much as possible.

Avoid using the letter ‘O’ because it can be easily mistaken for a 0. If you’re using Excel for inventory management, using a slash like this “/” could result in your SKU being interpreted as a date, while symbols like ‘>’, ‘*’, ‘^’ can also result in unintended consequences.

Whether you’re implementing an inventory management system for an ecommerce business a retail store you, can build a system in Excel, or check out this video on how to manage inventory with QuickBooks Online.

Start thinking about setting some goals and KPIs (key performance indicators) around inventory movement. Learn more about measuring your inventory turnover, average days to sell, return on investment, and carrying costs in this article on key metrics to measure your inventory management success.

If you’re learning about inventory management and organisation because you want to reduce expenses, this article on reducing inventory costs will offer a few ideas on where to start.

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