Stock Keeping Unit (SKU)

What is a Stock Keeping Unit (SKU)?

A stock keeping unit or SKU (pronounced “skew”) is a number that is assigned to a product for the purpose of inventory management and ease of tracking. In other words, a stock keeping unit is a unique identifier assigned to each product for easier and more efficient record-keeping.

The Importance of SKUs

Stock keeping units are highly important and commonly used by retail stores, warehouses and product fulfillment centers. Stock keeping units have many key uses, such as the following:

• Identifying a specific product
• Tracking inventory to know how many of a specific product is available
• Helping reconcile stock levels of products
• Identifying shrinkage in inventory
• Determining which products are the most profitable (through analysis)
• Helping identify reorder points for products
• Helping customers save time by enabling them to find products quickly

The inventory examination capability of SKUs has an exceptional contribution to a company’s revenue. Most often, customers make purchasing decisions after comparing the features of similar products. For example, when a customer purchases a baby car seat, online vendors may display similar items bought by other customers based on SKU information. This may lead to cross-selling opportunities, thereby increasing a company’s profit margin.

How Do SKUs Work?

Take this example: Jeff is the owner of a small grocery store that sells a specific brand of bread in addition to 10 other brands of bread. Jeff thinks that since his store is small, there is no need to use stock keeping units on each individual brand.

One day, a customer walks into the store asking whether the store has a specific brand of bread. Jeff recognizes the brand name and tells the customer that they do carry that brand of bread and leads the customer to where the bread aisle is. He then sees the store is out of stock of that brand of bread and apologizes to the customer.

The following day, Jeff sets up a meeting with his inventory manager, who says: “We should come up with a SKU for every single product in our store — it is inefficient for me to have to manually check whether we are low on specific products every day. Without an inventory system that incorporates SKUs, I have to manually subtract quantities that we have sold from our inventory system.”

Following the manager’s suggestion, Jeff employs a stock keeping unit for each specific product. With this setup, Jeff is now able to quickly check his computer system on every single product and their inventory levels.

How to Construct a SKU

A stock keeping unit is comprised of letters and numbers. The numbers and letters provide details about the product, such as the brand, model number, color, etc.

Each company follows its own way of creating SKUs for its products, and there is no incorrect way of making an SKU. With that being said, there are some best practices when constructing an SKU for a product:

1. Make each SKU unique. Never reuse a SKU and make sure each product comes with a unique SKU.
2. Keep SKUs short. Long SKUs may be difficult to read and may not work in some inventory management systems.
3. Do not use spaces or special characters. Creating a SKU with spaces or special characters can confuse people.
4. Do not use letters that can be mistaken with numbers. Refrain from using letters such as O and I, which can be mistaken for 0 and 1.

Let’s assume that we are in charge of assigning a SKU for a specific product: a pair of black Gucci jeans that is medium-sized. We can construct a SKU for the product, BLK-MED-G123-GUC, where:

• A dash is used to separate specific information about the product
• BLK refers to the color of the product (Black)
• MED refers to the size of the product (Medium)
• G123 refers to the model number given by the manufacturer
• GUC refers to the brand of the product

The SKU for the pair of jeans is a good example of a simple, unique and short SKU that also shares vital information about the product.

Universal Product Codes (UPCs) vs. SKUs

As with SKUs, universal product codes (UPCs) are uniquely assigned to track trade items in stores. UPCs consists of two parts — the scannable barcode and the 12 numbers beneath, which speed up the retail stores’ checkout process. In order to use UPCs on products, companies have to apply to become part of the system. UPCs can be identical for similar products from different companies.

In contrast, companies internally create SKUs for use on products and must ensure that the assigned SKU is not re-used on similar products. Take, for example, when a manufacturing company issues a SKU code for a discounted electronic gadget.

Customers can barely see the device from other sellers based on its SKU code alone. Such a system is designed to limit rival companies from poaching customers through matched advertising prices.

Additional Resources

• Inventory Turnover
• Last In, First Out
• Operating Cycle
• Product Costs
• See all accounting resources