In our eCommerce fulfillment blog we sometimes highlight industry jargon that’s essential for every entrepreneur. Today, we’re talking about SKUs, also known as Stock Keeping Units. SKUs are vital to inventory management and the success of any business—as pivotal to operations as a binding agent is to a meatball (i.e. without that factor, things will fall apart real fast).
If you’re involved in any kind of retail or online retail, you likely have some SKU process already in place. Whether you do or you don’t, this blog can help finetune your understanding of what SKUs can be utilized for, how to use them to grow your business, and best practices for this crucial part of inventory management.
What is a SKU?
A SKU is a code (typically 8 – 12 alphanumeric digits long) assigned to the items in your inventory. SKUs allow business owners to keep track of their products in terms of managing inventory levels, differentiating between products, and tracking products from vendor to customer.
Other SKU benefits at a glance include helping business owners measure sales by product and category, design a better user experience in their online stores, improve shopping interfaces, and analyze stock to avoid stockouts, overordering, and backorders.
SKUs are unique to your business and can be customized to fit your needs and the needs of your vendors and customers. Products are assigned different SKUs based on a variety of factors such as: type, category, price, manufacturer, model, style, color, and size. As such, no two products can have the same SKU.
Most business owners know what a SKU is, but few understand the important behind-the-curtains work a SKU performs to help a business thrive and scale. In addition to the basics (naming, calculating, etc.), let’s pull back that curtain and talk about creating SKUs and ways SKUs can optimize your inventory management and customer experience.
SKU Architecture – Breaking Down SKUs
SKUs provide sellers and the 3PL fulfillment centers that they work with invaluable data about sales and inventory management. But how exactly is a SKU created and structured?
As mentioned, a SKU is usually 8 – 12 alphanumeric digits long. The first few characters of that code delineate the broadest characteristic of the product—supplier, department, category. The characters that follow stand for product features—subcategory, brand, color, size, price. The final 2 – 3 characters in a SKU provide data related to inventory stock—the number of products you have in your store or 3PL fulfillment center, the order that they were purchased, and when they were processed.
An inventory management system and point-of-sales (POS) system are the easiest tools in the business owner tool belt for generating SKUs. There are online tools as well, and you can create SKUs by hand. However, that is not recommended because once your inventory grows this could get out of hand really quickly.
Creating a SKU
SKUs differentiate products within your inventory, making it possible to accurately track sales and stock. In terms of classification, the different alphanumerics in a SKU represent product traits that are then combined together to form a final code.
For example, if you’re a clothing vendor, the type of garment would have an alphanumeric assignment (jacket, coat, shirt, skirt, pants, etc.). The color would have an alphanumeric assignment (blue, red, green, yellow, pink, etc.). And the size would definitely have an alphanumeric assignment (small, medium, large, etc.). There may be other identifying traits to further recognize a specific product and simplify your inventory management, but for this example we’ll just take those three factors and show how you add the alphanumerics together to get your final SKU.
Once you have product SKUs, they are entered into your inventory management system, which is connected to your point-of-sales (POS) system. From there, products and sales can be tracked, and your inventory management system can acquire useful data that helps with reorders and customer relations.
How to Calculate SKUs in Your eCommerce Inventory
Calculating the number of SKUs in your inventory means taking into account all the product variations you offer. If we continue with the example from above, that would include product type, color, and size. We only used four product examples to show four SKUs in the chart above. However, for those items mentioned, all the variations would look like this:
In this case the formula for all your possible variations would be:
2 types x 3 colors x 3 sizes = 18 variations; you will have 18 SKUs
What are SKUs Used for?
SKUs help with your inventory management, allowing you to track products in terms of both inbound and outbound logistics. Additionally, SKUs make working with a 3PL fulfillment center infinitely easier. 3PLs like ShipMonk use SKUs to pick, pack, and send the correct inventory to customers as effectively and efficiently as possible from our eleven state-of-the-art warehouses. At a glance, some ways that a 3PL fulfillment center will utilize SKUs and advanced inventory management systems include:
- Showing eCommerce brands their real-time inventory levels based on SKU count
- Syncing inventory automatically by accessing SKUs from eCommerce sites
- Setting reorder points for each SKU based on a brand’s predetermined alert thresholds
- Kitting SKUs to be assembled in a specific way before being shipped to eCommerce customers
- Bundling SKUs across your inventory for promotions, trends, and seasonal shifts
- Providing in-depth inventory data to help eCommerce brands optimize ordering, boost marketing, forecast demand (think peak holiday season!), and enhance customer relations.
Going more granular, let’s take a closer look at the four items highlighted in that last bulletpoint.
SKUs collect data that speaks to product popularity, seasonal and cyclic sales trends, and patterns for different customer segments. That data is invaluable to eCommerce business owners, helping them order and stock inventory that complements those trends and matches consumer behavior. Furthermore, SKU info relating to inventory statuses/levels, flow, and turnover can be used to enhance inventory management systems by initiating data-driven triggers for stopping or initiating new inventory orders.
As SKU architecture highlights your most and least desired items, SKUs can also be used to influence inventory ordering in relation to strategy decisions, as noted below.
Advertising and Marketing
In today’s competitive eCommerce world, SKUs can be used to understand what aspects of your advertising and marketing efforts are working, and adjust accordingly. What do we mean? Well, SKUs make all the products in your inventory unique. SKUs allow you to track sales of the different items in your inventory. If you combine these two facts together, you can use stock and sales info to determine the effectiveness of advertising/marketing campaigns targeted to one specific product over another.
SKU data highlights how your stock is selling. With that data, you can better control your inventory order management. That involves reducing orders of less-popular products (saving money and warehouse space) and ordering more of the products that are selling well. Just keep in mind that you shouldn’t eliminate lower-selling SKUs from the shelves altogether, throwing them out like uneaten leftovers in the fridge.
The Harvard Business Review noted that, “Most of the time customers don’t buy products; they buy a bundle of attributes.” Meaning people aren’t just looking for jackets or blue clothes; they are looking for a bundle of product traits combined together, (more complex SKUs). Ergo, you shouldn’t make drastic decisions about cutting items from your inventory. You should also structure SKU architecture to best communicate different characteristics in a clear way, which will inform you what product traits vs. products are key to your inventory. With that info, you can strategically analyze your SKUs and predict demand for optimized inventory and customer satisfaction.
Enhancing Customer Relations
SKU data can be harnessed to anticipate orders and order flow. For example, accumulated SKU data could put eCommerce business owners in a better position to avoid stockouts, which adds to customer satisfaction because what buyers want is readily available. Additionally, SKUs may help customers find what they are looking for faster—recommending products (based on product trait/SKU similarity) or redirecting to commonly ordered items.
This little extra boost to user experience on an eCommerce website has a big impact on customer satisfaction because it ensures shoppers always have access to things they need AND things they didn’t even know they needed. Altogether, that equals more brand loyalty in the long run. And that means, if a protect ever is out of stock or backordered, customers are likely to be more patient vs. choosing another seller.
Don’t Get SKU’d on Inventory Management
Inventory accuracy leads to efficiency across the board, from optimizing your eCommerce website to maximizing your 3PL fulfillment center operations. SKUs allow that accuracy—serving as pivotal parts of inventory management that let you and your 3PL identify products, track products, analyze trends, improve marketing, optimize ordering/reordering strategy, and satisfy customer needs.
As noted with the above clothing example, once you have an alphanumeric key in place, creating and understanding SKUs is easy. So make sure you master all parts of this integral aspect of inventory management, and be sure to work with a 3PL fulfillment center that has a mastery of inventory management systems to complement it. ShipMonk is the perfect choice for that; our sophisticated eCommerce software is designed to enhance inventory management and all aspects of the eCommerce fulfillment experience. Contact a ShipMonk team member today to learn more!