If you’ve recently started selling products, you might be wondering, ‘What is an SKU’? It stands for Stock Keeping Unit, which is a term that is typically used when talking about inventory management. Managing inventory with SKUs is important for any business that sells products.
Setting up inventory tracking correctly is crucial, and this begins with the correct setup of SKUs for your products.
What is an SKU?
An SKU definition is simple: It is a product code that you (and others) can use to search and identify stock on hand from lists, invoices, or order forms.
Here are some of the key uses for an SKU:
Products that are received at a business need to be properly tracked to know how many are available. A product variation, i.e. Large Red Bucket, can be easily tracked using a cloud inventory management system. If the products in a warehouse or storage room have SKUs, then stock availability is easy to determine.
Stocktakes should be done at regular intervals (such as an annual stocktake for tax purposes) to ensure the actual stock levels at a business’ warehouse match the stock levels recorded in the inventory management system. Every product variation should have a unique SKU, meaning every item you're selling has its own code. Organizing and identifying products using SKUs makes for very straightforward reconciling of stock levels.
One crucial aspect for any business is tracking and identifying inventory shrinkage, which is the number of items a business cannot sell or are missing. Damaged or missing items can occur anywhere along the supply chain, and in many cases are lost due to theft. Diligent inventory categorization with SKUs enables transparency of stock movements and helps pinpoint where and how stock goes missing – minimizing the opportunity for theft.
Manually managing large quantities of inventory can be difficult for a small business owner. Adding an SKU to every product variation means the quantity of on-hand products is easily known. A threshold limit and reorder point for products can then be set, indicating when a new purchase order needs to be made.
Managing inventory with SKUs means you can keep better track of your inventory levels, reorder only when you need need to, and cut down on inventory holding costs.
By tracking product variants with SKUs you can report not just on the main product line, but right down to the individual variation of the product, i.e. color, size, material. These reports can help determine which product variants are your best sellers and which are underperforming. Not only does this give you a clearer picture of your major profit streams, but also helps you make strategic product decisions to grow your business.
Simply put, the SKU for the inventory of a business needs to be simple to understand. A typical SKU will have the first part used for product grouping and the other part for a unique value, such as the date.
Wherever possible, stick to an alphanumeric system for your SKUs and avoid accents and symbols that can cause formatting issues in Excel or elsewhere. To find out more, read our guide to SKU best practices.