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Stock Keeping Unit (SKU)

A number assigned to a product for inventory management and ease of tracking

What is a Stock Keeping Unit (SKU)?

A Stock Keeping Unit or SKU 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 easy identification.

 

SKU

 

The Importance of SKUs

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

  • 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 point for products
  • Helping customers save time by allowing them to find products quickly

 

How do SKUs Work?

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

Each company follows their own ways of creating SKUs for their 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 an 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 an 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.

 

Example of Constructing an SKU

Let’s assume that we are in charge of assigning an SKU to a specific product: a pair of black Gucci jeans that is medium sized.

We can construct an SKU for the product as follows: 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.

 

Application of SKUs

Jeff is the owner of a small grocery store that sells a specific brand of bread in addition to 10 other different 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. Unknowingly, he realizes that they were out of stock on 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 have an 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 SKU, I have to manually subtract quantities that we have sold from our inventory system.”

Following on 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.

 

Additional Resources

CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to transform anyone into a world-class financial analyst. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

  • Inventory Turnover
  • Last-In, First-Out
  • Operating Cycle
  • Product Costs

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes and training program!