Stock Keeping Unit (SKU)

A unique identifier allocated to each product label

What is a Stock Keeping Unit (SKU)?

A stock keeping unit (SKU) refers to a unique identifier allocated to each product label, and it is used to manage and track an inventory automatically. An SKU consists of a combination of alphanumeric characters identifying a distinct type of product for sale. It is usually scannable and identifies a product’s details such as manufacturer, brand, price, or size.

 

Stock Keeping Unit (SKU)

 

The meaning of a stock keeping unit (SKU) extends to the intangible but billable layout of products to be sold, such as warranties and repair time units in an auto body shop. SKUs vary by companies and are further different for goods and services.

 

Summary

  • A stock keeping unit (SKU) is used by vendors to keep track of a product’s inventory based on its relevant attributes from the other.
  • Stock keeping units (SKUs) influence product assortment, which greatly impacts consumers’ category-level purchasing, brand-level purchasing, store-level shopping frequency, and store choice.
  • By tracking the high traffic of products, SKUs prevent matched advertising practices to ensure a level field for a marketing competition.

 

Understanding Stock Keeping Units (SKU)

Inventory managers for a particular picking center usually prescribe a slotting criterion for products. The total operating expenses during a stock-picking exercise depend on a slotting strategy. SKUs are used to manage, coordinate, and achieve trade-offs in multiple activities that make up the supply chain process. The activities are achieved by using SKUs to track and manage inventory levels to maintain the order fill rate, representing the portion of fulfilled orders that can be replenished directly from inventory.

For inventory management, service levels comprise arguably an essential performance measure. After a product is purchased, it is scanned over the sale (POS) to expunge it from its inventory automatically. SKUs help warehouses, product fulfillment centers, service providers, and e-commerce vendors to account for every element of their inventory more accurately and quickly.

SKUs should not be confused by model numbers, although businesses that use model numbers can incorporate the latter into an SKU.

 

Formation of SKUs

Companies use SKUs in line with their own inventory policies. The specific approaches are, in turn, affected by the characteristics of the product. Whichever method is adopted, SKUs need to be followed and understood by everyone. For example, an SKU for green women’s dresses might look something like “G-W-D-005,” or a dog’s toy tennis ball might look something similar to “DT-TB-2005.”

The recommended approach when creating an SKU includes not using letters that look like numbers, starting an SKU with letters, not using the manufacturer’s number within an SKU, and not starting an SKU with a zero.

 

SKU - Example

 

Value Underlying SKUs

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 contents bought by other customers based on SKU information that bears little relevance to cost optimality. The above method may convert online users into customers, thereby increasing a company’s profit margin.

At the same time, SKUs allow the collection of data on product sales history. For example, stores can identify frequently bought product categories and poorly selling ones by scanning the SKUs. Such records are rich sources of information that may be used to predict sales to support order quantity and enhance planning decisions by inventory managers.

 

Universal Product Codes (UPCs) vs. Stock Keeping Inventories (SKUs)

As with SKUs, Universal Symbol 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 value is not re-used on similar products. Take, for example, when a manufacturing company issues an 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.

 

Special Considerations

SKUs within a set of brands are shaping the purchasing experience more than ever before. This has led to generally accepted slotting and stock-picking criteria. For example, modern retailers are equipped with portable scanners that scan the floor sample to enable salespeople to check back-of-the-store inventory according to demand value characteristics.

Unlike in the past, salespeople would ransack the back stockroom and search for a specific item that intuitively appeals to the customer. As a result, the modern SKU system is highly responsive, helping create a high service level.

 

Additional Resources

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • First In First Out (FIFO)
  • Inventory Turnover
  • Last In First Out (LIFO)
  • Logistics

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