If your small business is growing, it’s a great time to think about optimising your inventory management by implementing stock-keeping units (SKUs). We’ll take a deep dive into what SKUs are, how to create SKUs and how your business can benefit from using SKUs in your inventory management strategy.
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What is a Stock Keeping Unit (SKU) and How to Create SKUs
In this article you will learn:
- What does SKU stand for?
- What is a Stock Keeping Unit (SKU)?
- What is the difference between a SKU and UPC?
- What is the difference between a SKU and a barcode?
- How to create SKUs
- Examples of SKUs
- Best practices to optimise SKU setup
- Make SKUs unique but understandable
- Arrange attributes according to importance
- Avoid spaces, accents, symbols, and letters that look like numbers
- What are the benefits of SKUs?
- Tracking SKUs with inventory management software
What does SKU stand for?
If you’re wondering, ‘what is SKU?’ we should start with defining the acronym. SKU stands for Stock Keeping Unit. It is also sometimes known as the product code (not to be confused with a barcode).
What is a Stock Keeping Unit (SKU)?
A stock-keeping unit (SKU) refers to a code that identifies all your product features. SKUs are alpha-numeric-based and usually consist of eight to ten numbers and letters that serve as a unique identifier and correspond to the item’s product details, price, and manufacturer. SKUs are often scannable labels that allow you to automatically track inventory levels and movement.
What is the difference between a SKU and UPC?
It’s frequently easy to confuse SKUs and Universal Product Codes (UPCs). SKUs differ from UPCs in many ways. A UPC is numeric-based, universal, and consists of 12 digits typically accompanying a barcode. This number allows you to keep track of a product at various points in the supply chain, and it’s mandatory for products you sell through the retail supply chain.
An international organisation — GS1, formerly known as the Uniform Product Code Council — generates and issues the UPCs to ensure product code standardisation. This is the organisation to turn to if you have questions or concerns regarding the legitimacy or compliance of any UPCs you purchase.
What is the difference between a SKU and a barcode?
The barcode remains the same 12-digit code or UPC for each product, regardless of the retailer selling it. This system is easier for your customers to find a specific item at your retail location and know they’re receiving the same item. It distinguishes barcodes from the SKU codes that are unique to your business.
When you manufacture goods or create products, you need to purchase UPCs to ensure the governing body doesn’t issue identical UPCs for two different items. Companies that provide UPCs often sell them online, and most companies maintain rigid integrity standards to prevent duplicate codes on the market.
If your company sells products on a global scale, certain countries may require a specialised version of a UPC. This 13-digit code is an International Article Number (IAN) or a European Article Number (EAN). If you’re uncertain which code to select for a country where your company plans to sell its products, you can check with the retailer you sell through.
How to create SKUs
You can easily create your own unique stock-keeping units using our free SKU Generator or you can use product variants to create SKUs manually.
It’s a good idea to create a list of the variants that describe and distinguish your products from each other such as:
- Type
- Brand
- Colour
- Size
- Gender
- Stock location
- Origin
- Purchase date
Let’s say you’re selling red boots for women in size 6. You might create an SKU ‘RED-BTS-W-06’ using the following variants:
- Colour: RED (for red)
- Type: BTS (for boots)
- Gender: W (women)
- Size: 06 (shoe size six)
You can repeat this process to create unique SKUs for product variants.
Examples of SKUs
Let’s use the format from the example above to create SKUs for women's boots in different colours and sizes:
- Blue boots for women in size 7 = BLU-BTS-W-07
- Black boots for women in size 8 = BLK-BTS-W-08
- Green boots for women in size 9 = GRN-BTS-W-09
In the example, we have used the colour variant and size variant which distinguish the products. By prefixing and suffixing the SKU with the variants, in this case colour and size, we make the SKU easy to comprehend while still grouping all the boots for women together with the code ‘BTS-W’ for easy identification.
While customers may not notice that any of this has meaning, this SKU easily tells you valuable information about the product and makes it easy to track and keeps your inventory organised. Categorising your stock is valuable for an effective stocktake.
Best practices to optimise SKU setup
Setting up SKUs is easy, but it’s a good idea to follow a few rules to maximise their use. It’s beneficial to ensure you never use the same SKU for different products and avoid using a manufacturer’s SKU, as they’re often too long. If you change suppliers, they become meaningless to your business. Here are a few suggestions to make formatting easier for your business.
Make SKUs unique but understandable
The letters and numbers in SKUs should represent important product information. Use a combination of abbreviated letters and numbers to signify product variants. Keep it short: between 8 and 12 characters.
Don’t overcomplicate your system by loading the numbers with a meaning 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 in a size small from your Autumn/Winter 2021 collection, isn’t ‘AW21DrBS’ easier to understand than ‘15020101’?
In this example of the SKU ‘AW21DrBS’, the breakdown is:
- AW = Autumn/Winter
- 21 = 2021 (year)
- Dr = Dress
- B = Blue
- S = Small
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 or year will help you limit your searches to the right collection, followed by increasingly broader characteristics like product type, colour and size.
Try to maintain the same format to ensure readability and consistency. This will create efficiency when you reorder inventory and conduct stocktakes.
Avoid spaces, accents, 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. Here are some examples of symbols to avoid:
- 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.
- Symbols like ‘>’, ‘*’, ‘^’ can also create confusion among staff and inventory systems.
What are the benefits of SKUs?
Having an SKU system in place can help small businesses organise and manage inventory and make informed purchasing decisions. Here are some of the benefits of having SKUs and reasons why small businesses should use SKUs:
- Improved inventory management: SKUs allow you to search and identify stock on hand from orders, invoices and your inventory system. With a good SKU system that defines your product right down to the minute details, you’ll also be able to track inventory movement of the individual variants of every product, such as colour, size and location.
- Improved sales forecasting: 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.
- Prevent stockouts: Understanding in demand SKUs allows your business to easily identify inventory turnover of specific products, calculate reorder points and optimal order quantity to ensure sufficient stock levels to meet customer demand. Using inventory management software like QuickBooks provides low stock alerts so you can reorder SKUs that are in demand on time.
- Enhanced quality control: SKUs enhance quality control in a warehouse filled with thousands of products. SKUs help you locate items and increase customer satisfaction by decreasing human errors and allowing for faster delivery to your customers.
- Increased efficiency and productivity: SKUs increase your company’s efficiency and productivity by facilitating operations (sales to inventory) to sort and search at every stage of the sales process. SKUs also make it easier to categorise and count stock during stocktaking.
Tracking SKUs with inventory management software
Using inventory management software is an efficient way to record, manage and keep track of SKUs. Using QuickBooks Online inventory management software allows you to enter inventory information and seamlessly sync your invoices, inventory, products, SKUs, purchase order and supplier information all in one place. Join a free 30-day trial to see how QuickBooks can simplify your inventory management.
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