SKU: What It Is and How to Create It Correctly

SKU (Stock Keeping Unit) is a unique identifier assigned to products to optimize inventory management, analyze sales by category, and determine when to replenish stock.

SKU example

What is an SKU?

Let’s dive into what an SKU is and why it's important.

Similar to the widely used barcode, SKU plays a key role in product identification. However, unlike barcodes, which are used to track products at all stages of the supply chain, SKU is an internal system of the company. SKU is created based on the specific product characteristics that are most important for its efficient sorting, accounting, and management within the company. For example, in relation to clothing, an SKU may encode data such as brand, type of clothing (t-shirt, jeans, shirt, etc.), color, size, additional features (hood, pockets), and more.

SKU structure

The SKU code is generated arbitrarily and usually consists of letters, numbers, or other symbols. For example, an SKU may contain information about the manufacturer, release date, size, model, color, and other characteristics.

Let’s take a company that manufactures sports equipment as an example. An SKU for a tennis racket includes encoded data about:

• Manufacturer brand: YX (Yonex).

• Racket model: V70.

• Racket type (adult/children’s): A (Adult).

• Racket weight: 300 (grams).

• Handle material: Gr (Graphite).

Thus, with SKU YX-V70A-300Gr, the company can instantly identify a specific tennis racket in the warehouse. This simplifies processes like receiving goods, tracking inventory, placing orders for new supplies, and managing the product range.

Where SKUs are used

Inventory management. Lack of control over stock is a serious issue for businesses. Without proper inventory management, products may disappear, become stagnant in the warehouse, and lack a unified sorting system. This all leads to financial losses. The solution lies in the effective use of SKU identifiers. SKUs are universal—they can be used to describe any product, from a jar of jam to an airplane wing. With an SKU system, you optimize inventory management and avoid losses.

Product display. The success of a retail location largely depends on how products are arranged. Customers tend to pick up what they see first, so the most popular items should be on prominent shelves. Merchandisers handle this, overseeing stock levels and product placement. Additionally, SKUs significantly simplify the work of staff. Employees can quickly locate products, which optimizes the processes of assembling and shipping orders.

How effective are your retail locations? Can revenue be improved? Check out the article "Average Order Value: What It Is, How to Calculate It, and Why It’s Important" to learn how to track this efficiency metric and how to enhance it.

Planning. When developing procurement strategies, using SKU codes allows you to streamline the process, minimize unnecessary orders, reduce the volume of unprofitable items, or run promotions. It becomes easier to identify demand trends based on price, sales channel, and other aspects.

Customer service improvement. By using unique SKU codes for each category and product group, you can quickly update information in your online store. This ensures customers see up-to-date information on product availability. If certain items are sold out, customers are immediately informed. Additionally, SKU codes speed up the return and exchange processes. It can be challenging to identify the exact hoodie when a customer wants to exchange a black size XL for an XXL. Listing the SKU makes it much easier for the staff to find the right model.

Defective goods tracking. Issues like product damage or loss can occur at any stage of the logistics process. To minimize losses, it's important to identify them promptly and investigate the causes. SKU codes help easily determine which product became unsellable and at which stage of the supply chain. If these incidents regularly happen due to the same factors, management should review the process. It may be necessary to change the supplier or carrier.

SKU or UPC

SKU and UPC (Universal Product Code) are two product identification systems used for inventory management. Let’s explore how they differ.

UPC example. Source: scandit.com

What they are used for

SKU. Used internally within a company to track products and manage inventory. Sometimes, marketing strategies are based on SKU data.

To save time on routine tasks, use the Altcraft Platform. This marketing automation platform gathers data to help you create analytical reports and improve your marketing efforts.

UPC. Used for external purposes, mainly in retail stores. It automates checkout processing when products are sold.

Key features

SKU. An internal code used by stores to track products with different characteristics, such as size, color, or weight. It is essential for warehouse control and inventory management. The company itself determines the SKU format. It often consists of 8 characters and may include both letters and numbers. Using it is not mandatory — it’s up to the company to decide. Businesses use SKUs for convenience rather than because they are required to.

UPC. A universal external product code scanned at checkout. It identifies the product itself, not its features or categories. A UPC typically consists of 12 digits, with the first six sometimes identifying the manufacturer. UPCs follow an international standard and contain only numbers. Using a UPC is mandatory.

Where they are used

SKU. Each product within the company has its own SKU, allowing detailed tracking of various product types. Inventory management and internal tracking are much simpler with SKUs.

UPC. A globally unique code ensuring that a product has a distinct number in the world market. It’s used for external product identification, such as in sales or imports.

Where they are placed

SKU. Usually placed on the packaging during transport.

UPC. Placed on the price tag and scanned at checkout.

Despite their differences, SKUs and UPCs complement each other in the supply chain and sales processes. SKUs provide accurate internal inventory tracking, while UPCs simplify product identification and processing during sales.

Creating and decoding SKU

This product identifier does not adhere to strict universal standards. Each company independently decides what information and in what format to include in this code. However, there are general guidelines. Typically, an SKU code contains the following details:

• Product manufacturer.

• Product size and material.

• Type of packaging.

• Number of product units.

• Product location.

The list of characteristics included in an SKU is not limited. Depending on the specifics of the product and the inventory management goals, additional information can be added, such as expiration date, volume, weight, color, variations (e.g., with or without pockets), and any other data useful for inventory and warehouse operations optimization.

Example of an SKU

Let’s assume an electronics store sells smartphones from five different manufacturers. In this case, the SKU code may include the following information:

• A letter representing the manufacturer. For example, S — Samsung, A — Apple, X — Xiaomi, H — Huawei, L — LG.
• Type of device. 1 — smartphone, 2 — tablet, 3 — smartwatch.
• Memory capacity. For example, 64 — 64 GB, 128 — 128 GB, 256 — 256 GB, 512 — 512 GB.
• Color. 1 — black, 2 — white, 3 — silver, 4 — blue, 5 — pink.
• Warehouse location. For example, S2-Y3-P1 — second shelf, third row, first position.
• Number of remaining units. The SKU must be updated after each restock or sale.

For example, the SKU code for a Samsung smartphone with 128 GB of memory, black color, located on the third shelf in the warehouse would be: S/1/128/1/S3.

How to use SKUs correctly

When working with product identifiers, it’s important to consider several nuances to increase their effectiveness. Here are a few recommendations:

• SKU uniqueness. It's essential to avoid assigning the same code to two, even very similar, products. This simplifies inventory management by eliminating confusion and errors.

• SKU readability. Use simple fonts and clear abbreviations to ensure the SKU is easy to read. If no one can understand your SKU, it won’t be useful—employees will get confused or spend too much time trying to decipher it. Where possible, create SKUs with visual meaning. For example, use the first letters of the supplier or brand name. Such codes are easier to remember and process manually.

• Consistency across all systems. If you maintain the same SKU across all internal systems, whether it's for cross-channel analytics, an online store, or a marketplace system, you’ll avoid confusion during order processing. Customers will receive exactly the product they wanted.

• Add sequential numbering. Using sequential numbers (001, 002, etc.) helps track products easily. This allows you to quickly locate old and new items.

• Train employees on SKU interpretation. All staff involved in sales and inventory management should be able to easily read the information encoded in the SKU. Without this, SKUs lose their practical value.

• Avoid using zeros or special characters. Some inventory management software ignores zeros in SKU codes, and employees often confuse them with the letter "O," which leads to input errors. Similarly, using special characters like !, @, or & often causes problems with some software, so it’s better to avoid them in SKUs.

Conclusion

SKU is not just a unique code; it is the foundation of efficient inventory management. It acts as a kind of passport for a product within a company, containing all the necessary information, from the manufacturer and product characteristics to its location in the warehouse. The use of SKUs provides brands with several key advantages.

First, it ensures accuracy in tracking and control. With the code, you can instantly monitor product availability at any stage, from arrival to sale.

Second, it optimizes warehouse logistics. The code allows you to quickly locate the required item and reduce the time spent on order fulfillment.

Third, it enables effective analytics. Using SKU, you can easily identify popular products, detect underperforming items, and adjust your inventory accordingly.

Thanks to the SKU coding system, companies not only reduce costs but also improve customer service by processing orders more efficiently.