In this white paper, we will help the reader to understand what a Stock Keeping Unit is, and why it is so important. We will start off by looking at SKU design and providing some examples of how they can be used. We will then go on to outline best practices for SKU generation, and examine a few common anti-patterns of SKU design.
SKU (pronounced “skew”) is an acronym for “stock keeping unit,” and simply put, denotes the smallest selling unit of a product or service. SKUs account for the amount of product in inventory, tracking how many units of billable entities are sold. They are used internally by warehouses, fulfillment centers, trade customers, marketplaces, catalogs, and e-commerce platforms among others, and provide a number of benefits. SKUs allow the relationships between products to be more easily recognized, and users can print labels that display the SKU as either human-readable or as a barcode for the purposes of scanning (shown in the picture example below).
Products often come in a variety of models or styles, and while each has its own SKU, SKUs are not to be confused with the model number of a product. Model numbers and other attributes are often included in all or part of an SKU. Practices vary from company to company, and many businesses use part numbers, product codes, and item IDs, all of which are distinct from SKUs. Always be sure to distinguish between SKUs and other identification numbers when designing SKU numbers.
SKU on barcode
Before you start labeling SKUs with shortened product names or unique serial numbers, it is essential to take a step back and determine the data that will help you to design your SKUs most efficiently
Here are a few essential data points to be considered:
The above questions will help you draw some high-level boundaries for the formulation of SKU numbers. All businesses have different needs, so it’s best not to limit yourself to these factors
You can make some judgments, for example…
Example 1: SKU numbers between 6 to 8 characters in length will suffice.
OR
Example 2: SKU numbers for a specific vendor start with an “A”, while for all other vendors they start with a “B”.
Successful inventory management systems assign a unique SKU for each product and for each of its variants. Different models or flavors of the product have independent SKUs, as do packages that bundle a number of related products. This has clear advantages: it allows merchants to track whether blue shirts are selling better than green shirts, for one simple example When designing an SKU, the idea is for the SKU to be useful, and to make sense to all parties involved in the handling of your items. For SKUs to work correctly, they must be assigned to each and every variation of a product. Thus, for every change in color or size, a unique SKU must be assigned.
Customers buy products based on choices at the attribute level. If you cannot gather demand intelligence at this level, you are out of touch with your customer.
It might seem obvious, but customers do not buy SKUs; they don’t know SKU numbers, nor do they care. Meanwhile, knowing what SKU attributes customers are buying can dramatically improve your demand response, allowing you to forecast demand at the attribute level – the level at which customers are buying. If you know what attributes are selling together, you can easily implement an automated recommendation engine, giving your sales reps the ability to make recommendations to the customer during the shopping process. This is probably the most powerful thing about understanding what attributes customers are buying. When dealing with customers, your salespeople benefit immeasurably from knowing what similar customers purchase. It couldn’t be any simpler: salespeople are your customers’ trusted advisors, and this information allows them to make better recommendations. That leads to happier customers, translating to higher sales repeatability. Smarter salespeople, better service, and higher sales, all from the data gleaned from a simple SKU.
An SKU usually includes details such as manufacturer, product description, material, size, color, and packaging, and may even include details about the warranty.
As an example, the SKU assigned to a Wrangler Jacket (WRA-JA-RG-42-BL) is diagrammed below:
Ideally, the SKU code is extendable; for example, if the product is typically purchased by the trade-in cases, the SKU for a case of Wranglers should be something like “WRA-JA-RG-42-BL-C30.” In this case, the “C” stands for case, followed by the number of units in that case. Below, we’ve provided some examples to illustrate a few different variants of SKU.
If you’re selling ink pens in three different colors, the SKUs might look something like this:
Ink Pen, Red, Model no.1 = IP01-R
Ink Pen, Blue, Model no.1 = IP01-B
Ink Pen, Green, Model no.1 = IP01-G
In this example, we have used the color variant, which distinguishes the items, as the last value in the SKU. By suffixing the SKU with the variant, we make the SKU easy to comprehend while still grouping together all ink pens with IP01 for ease of use.
For a slightly more complex example, we’ll add a few more variants. Season, product name, product type, size, and color have all been incorporated into the below SKUs.
Summer 2015, Cotton Tee, Small, Red = S15T-COT-RS
Summer 2014, Cotton Tee, Medium, Red = S14T-COT-RM
Summer 2012, Lady Tee, Small, White = S12T-LAD-WS
Summer 2012, Lady Tee, Large, White = S12T-LAD-WL
Now that you understand SKUs, let’s take a look at some best practices and tips for enterprises and merchants who want to create SKUs for their products
Once your SKU definition is in place, 75% of the cost structure and efficiency of your supply chain have been fixed. Your supply chain operates under the assumption that the SKU definition is correct. What does this mean? Simply, this means that
if you utilize two SKUs with slightly different attributes that could have been consolidated into one, the supply chain will suffer that cost and inefficiency. That means it’s crucial for the SKU definition to be optimized before you send it into the supply chain Let us now discuss a few anti-patterns which you should take care to avoid when designing SKUs.
For example, when referring to a “27 oz. White Gloss Dry Oil Paint”
The business using this paint may buy the product from any of those manufacturers because each supplier manufactures the SKUs to the same specification. The user doesn’t want to utilize any of those manufacturer’s SKU numbers to identify this product, because it would imply that one manufacturer is acceptable and the other ones aren’t; moreover, the user wants to employ a consistent format for all of its SKUs As a solution, the user devises its own SKU numbering system, resulting in a new SKU number of “WH-GL-DR-OP-27.” This way, a retailer remains flexible enough to change manufacturers or wholesalers without the hassle of a system overhaul.
It’s not a formal science, but before you start adding products to a shopping system you should decide on the best format for your SKUs.
In the eCommerce world, product labeling is crucial, particularly SKUs. Businesses should take proactive steps to eliminate SKU numbering bottlenecks, such as too many SKUs, improper numbering, and overly long numbers. They should adopt best practices now so that in the future they can add new products seamlessly, acquire new businesses, and simplify end-to-end inventory management.
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Nisum is a global consulting firm headquartered in Southern California. Founded in 2000 with the customer-centric motto, Building Success Together®, we’ve grown to comprise over 1,400 consultants, and 8 offices across the United States, India, Chile, and Pakistan. Our philosophy and deep technical expertise result in integrated solutions that deliver real and measurable growth.
Whether you’re a hot start-up or a major global brand, our approach is the same: forge the most powerful connection possible between people, processes, and products to achieve unparalleled success. At the intersection of business and technology, Nisum has everything you need to grow your organization. From Strategic IT Planning, Agile Enablement, and Business Process Engineering to Application Development, Test Automation, and DevOps, Nisum has you covered. We specialize in building Adaptable Back-End systems such as Order Management, Inventory, and eCommerce to facilitate true omnichannel success for our customers.
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