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SKUs explained

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Every ecommerce merchant knows that their success at fulfilling orders hinges on one key thing: Good inventory management.

But it’s one thing to say it, and another to actually carry it out in practice.

According to the IHl Group, worldwide inventory distortion (including overstocking and stock-outs) costs an estimated $1.1 trillion a year, while the average U.S. retailer has an inventory accuracy of just 63% – severely affecting their ability to both attract and retain loyal customers.

But there’s an easy way that merchants can boost the effectiveness of their inventory management; by implementing a comprehensive SKU system.

What are SKUs?

An SKU (also known as a Stock Keeping Unit) is a unique alphanumeric barcode that’s assigned to a product in order to track inventory levels and variations of that item, including size, color, model, material, and warranty.

Because unique SKUs are generated for each of these variations, this makes it easy for merchants to keep a record of both current and historic versions of their stock, which is very useful for mapping sales data and determining which SKUs are generating the highest profits for your business.

Here’s an example of a series of SKUs for a pair of sneakers that maps out the season, product name, and product type, followed by size and color variants:

Fall 2020, All-Star Sneaker, White, Size 9: F20-SN-AS-W-9
Fall 2020, All-Star Sneaker, White, Size 10: F20-SN-AS-W-10
Fall 2020, All-Star Sneaker, Pink, Size 9: F20-SN-AS-P-9

Difference between SKUs and UPCs

SKUs and UPCs (Universal Product Codes) are often talked about interchangeably in ecommerce, but they actually serve very different purposes.

The UPC for a product is assigned at the point of manufacturing, and so remains consistent regardless of which region it’s sold in and what vendor is selling it.  

By comparison, SKUs are an internal stock management system that’s decided on by the individual merchant. Therefore, which product variations are incorporated in SKUs can vary widely between vendors.

This means that SKUs can actually confer a major competitive advantage on D2C brands – if they’re creating and organizing their SKUs in a way that streamlines their inventory and order management and minimizes stock errors.

How to create SKUs

When creating SKUs, businesses can either use an SKU generator (normally included within their inventory management system) or else manage the SKU architecture themselves.

Whichever way you decide to do this, it’s important to remember that SKUs should be readable for humans just as much as computers. If you’re going to minimize confusion and errors, it’s important that SKUs are clearly identifiable to both your staff in the warehouse and sales associates on the shop floor.

You can achieve this by implementing the best practice guidelines for creating SKUs:

Keep SKUs clear and concise. For clarity, your SKUs shouldn’t include any more characters than is needed to communicate essential product information. Furthermore, it’s a good idea to avoid the use of characters that could cause confusion for both staff and consumers. ‘0’ and ‘o’ are easy to confuse at a glance, as are ‘1’ and ‘l’.

Start with general information, then go specific. It’s logical for your SKUs to start with the base characteristics of the product before moving onto variations. For example, the first section of your SKU could cover the season and product category, followed by the style and then the relevant variations.

Avoid using manufacturer data as part of SKUs. While using these serial codes might be more convenient in the short-term, this can spell future difficulties for your business. If you ever decided to change manufacturers, all of your SKU architecture would have to be completely overhauled – a situation no merchant wants to find themselves in!

Why SKUs are essential for good inventory management

Now that you understand SKUs and how to create them, it’s time to get to the heart of the topic: Why SKUs are a must-have to keep your inventory management running smoothly!

Improved inventory tracking

Not only does a lack of SKUs make you more prone to errors; it’s also very costly in terms of time. Even a small vendor with low order volumes is likely to keep hundreds of items in their warehouse – meaning that keeping track of what product variations are available and where they’re located can quickly become a herculean task.

An effective SKU system makes it much easier for your teams to identify stock levels accurately and set triggers for when stock replenishments are required, thus avoiding stock-outs that could cause you to lose valuable sales. Moreover, reducing stock-outs and overstocks in this way can lower your inventory costs by as much as 10%!

More accurate sales forecasting

Because SKU counts are tied directly to sales data, it’s a very intuitive process for merchants to forecast future peaks and troughs in consumer demand during different seasons. This ensures that inventory levels align closely with your orders, and avoids situations like an excess or a lack of certain SKUs that can disrupt warehousing operations.

Accurate sales forecasting also enables your business to execute much more effective sales and marketing strategies by pinpointing exactly what products your customers will be interested in and when, thus increasing your revenue and ROI.

Better SKU proliferation vs. rationalization

Detailed SKU architecture allows your business to identify exactly which product variants are performing either positively or negatively, meaning you can analyze in-depth which SKUs are worth keeping as product offerings.

For example, if green is lagging far behind the other colors available in a particular t-shirt style, it could be worth axing this SKU entirely and ‘rationalizing’ that offering. Likewise, if another SKU is a best-seller, you have the data to justify adding SKUs that match consumer preferences and so ‘proliferate’ that product further.

Enhanced customer service

Shopping via ecommerce stores offers consumers many perks in the form of convenience and the ease of browsing products. But there are also unique challenges to offering a seamless customer experience online – especially when it comes to showing accurate stock and product information.

Because SKUs give merchants advanced abilities for track stock levels, they can make this same information available to their customers in real-time. This creates a much more transparent approach to online shopping, as well as minimizing the odds of a stock outage.

Furthermore, if a stock outage does take place, SKUs can help customer service teams to make much more accurate alternative product recommendations to customers, which helps to boost customer loyalty and retention.

Without strong inventory management, it’s almost impossible to fulfill consumer expectations for fast, effective order processing and delivery. But by adopting effective SKU architecture for tracking inventory and sales activity, your business will be much better placed to take advantage of growth opportunities and facilitate positive customer experiences.

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