SKUs: What Are They & Why Are They Important to eCommerce?

Inventory management is one of the most important aspects of running an eCommerce business. As your business grows, items start flying off the shelves, and you find yourself with many orders to ship to your customers. The need to reorder and replenish your shelves with a lot more stock arises, and you find it difficult to keep track of individual items manually.

This is where SKU numbers come in!

SKU numbers help you create an efficient way to organize your inventory and track individual items in your store. This not only makes it easy for you to manage your inventory and avoid out-of-stock situations, but also avoid costly errors and mistakes that can spell doom to your business.

But what does SKU stand for and how does it work?

This article dives deep into what SKU numbers are, how they work, their importance, and several ways an optimized SKU system can help improve your eCommerce business performance.

What is an SKU Number?

Before we dive into SKU numbers, it is good that you know the SKU's meaning. Therefore, let us start with an SKU definition.

SKU is short for Stock Keeping Unit. A Stock Keeping Unit is an alphanumeric code used by retailers to keep track of individual items in their inventory. They represent different product characteristics such as model, size, brand, color, item location, among others.

How Does an SKU Work?

Stock-keeping units work differently for different retailers as there is no one-size-fits-all when it comes to choosing an SKU generator. The basic idea is that retailers assign SKU numbers to help identify items in their store quickly and easily based on brand, category, subcategory, size, color, among other features.

The information contained in an SKU number is ordered from the most important features to the least important ones that distinguish different products. For example, red and blue T-shirts from the same brand that is of the same style will be represented by the same SKUs except for one number or letter that denotes the color variation.

Why Are They Important to eCommerce?

SKU management is very important to online retailers, order fulfillment centers, and warehouse managers. They help them keep track of inventory and trace inventory levels to identify items that need reordering so that they can replenish their shelves accordingly.

So, the ultimate importance of SKU numbers is to help identify different products in your inventory and organize them for easier inventory management and order fulfillment. They make it easy to:

• Look up product information
• Find products quickly
• Smoothen the 3PL working process
• Identify and organize products
• Improve business decision making

SKU vs. UPC

UPC is short for the Universal Product Code. Both SKUs and UPCs consist of important information that helps manufacturers and retailers to keep track of products, but they have slightly different meanings and use. Here are the key differences between SKU vs UPC.

• Length: an SKU can be any length as determined by the store owner, while UPCs are always 12 digits
• Creation: SKUs are created and assigned by retailers or store owners; UPCs are created and assigned by the Global Standard Organization (GS-1) in collaboration with manufacturers.
• Composition: SKUs are alphanumeric codes consisting of numbers and letters; UPCs are numeric codes only and contain no letters.
• Extend of use: SKUs are unique to individual retailers and are used internally within a company for stock-keeping purposes to track inventory; UPCs are universal and consistent across all retailers and remain the same throughout the products' life cycle. They are used externally to keep track of products throughout the supply chain.
• Information contained: SKU contains essential information related to Retailers' Company and products; UPC consists of information that identifies manufacturers and producers selling the product.

How to Create a Good SKU System?

There is no standardized method of creating an SKU management system and you can make an SKU number the way you choose. But your SKU codes should be easily understandable by you, your employees, and vendors. You should be able to know which products your SKU codes denote by looking at them. Therefore, it is essential to have a systematic SKU generator for creating SKUs and tagging products with them in your store.

There are two ways of creating SKU numbers:

• You can create them yourself
• You can use your Inventory Management System (IMS) to generate them automatically

Whatever SKU generator you choose, it is advisable to give your SKU codes some meaning. Here are some SKU best practices that you should follow when creating an SKU number.

• Generate SKU codes that can easily be understood: Avoid using symbols such as $, %, &,!, /, in your SKU numbers as they can confuse and result in formatting or human errors.
• Never start your SKU number with zero: different software disregard it and start with the next number.
• Have a set SKU formula: having a set formula that accommodates the specific needs and features of your business will help you generate efficient and memorable SKU numbers.
• Start SKU numbers with top-level identifiers: use the first two or three characters in your SKU number to denote a top-level identifier such as a department, store category, supplier, or store location if you run multiple stores.
• Middle numbers should represent unique identifiers: it is best practice to use the middle characters of your SKU numbers to assign unique features like subcategory, item type, size, color, or style so that it makes sense of the product you sell.
• Finish your SKU number with a sequential number: to make for easy setup and identification of newer and older items in a product line, it is good to use sequential numbering such as 001,002, 003 –for the last part of your SKU number.

Here is a great SKU example based on the above criteria:

Description: Purple sportswear for men

SKU Number: M-S-P-0012.

In this example, M stands for men, S for sportswear, P for color, and 0012 is the item code.

8 Ways Optimized SKU Can Improve Your Business Performance

It is easier for an eCommerce store to manage inventory and fulfill orders when there is a defined system to help distinguish between different products. An efficient and well-thought-out SKU management system can help you manage and plan your eCommerce store in multiple ways.

Here is how an optimized SKU system can improve your business performance.

1. Track and improve sales

SKUs carry important information about the brand name, product category, subcategory, size, color, or style. That means you can identify the most in- demand product SKUs. Your team will be able to know and keep track of the products customers buy the most and the ones that are less popular based on SKU trends.

They can, therefore, replenish the stock with a lot of the most popular products as opposed to less-desired ones. This will help improve your sales and boost profits.

2. Improving merchant-vendor communications

SKUs can be very handy when you want to have smoother communication with your vendors. You can use SKUs for sales forecasts and set expectations for anticipated product demand. You can then pass this information to your vendors and check with them to ensure that they can meet your minimum demand requirements.

After gauging the future demand or establishing product trends on some categories, you can set timeframes for supplies with your vendors to reduce the likelihood of late shipments. You can also start working with additional suppliers early enough if the current ones cannot meet your minimum demand requirements.

3. Avoid out of stock situations and boost customer satisfaction

You can use product SKUs to set reorder points that trigger alerts to buy more items at a particular inventory level in your eCommerce business. That means low stock levels become less problematic and you can avoid out-of-stock situations completely.

Your customers will find the products they want to buy available in your store and they will not wander away finding merchandise elsewhere. The net result is customer loyalty due to customer satisfaction.

4. Speeding up inventory tracking

A well-throughout SKU management system helps reduce many of the challenges associated with running warehouse logistics manually. They make it possible to track inventory swiftly by facilitating accurate stock taking. It is easier to conduct stock counts with SKUs and get an accurate picture of what is available for sale, hence avoiding stockouts.

It also solves the problem of full inventory counts or cycle counts allowing you to stay on top of inventory tracking hence avoiding substantial disruptions to business operations.

5. Improved search for your e-store

Customers looking for a specific item will get to your store via search. After narrowing down their choices, they are likely to copy some specific details such as color, size, and style of the product they are looking for into search to find a store they like and do a final check.

Repeat customers seeking to purchase the same product again are also likely to copy and paste product SKUs from their email into search. If you don't use SKUs, your store won't show up among the results, but if you use them, your store is likely to pop up with a better deal and close the sale.

6. Reduced risk of errors, theft, or damage

Errors and mistakes or outright theft are some of the leading reasons why items get misplaced or go missing in warehouses. When you use SKUs to tag your items immediately after they arrive, you’ll be able to know where they are, or whenever they go missing.

That means you can track your items immediately when they hit your shelves till they reach your buyers' doorsteps, hence doing away with costly mistakes. This reduces the risk of items getting stolen, lost or damaged.

7. Easier marketing and remarketing

With product SKUs, you can improve your marketing and remarketing techniques whenever you realize that potential customers are looking for certain products in your store. You can use the product’s SKU numbers to reach them out with targeted ads and make sure that you are not losing any sales.

8. Improved third-party fulfillment

A third-party fulfillment provider is a company that stores and ships your products, and will want to know about your SKUs to streamline the whole process. They can use your SKUs to offer you automatic inventory sync, order and shipping tracking, real-time inventory counts, reordering point, and other in-depth analytics.

Now that you know the SKU meaning, the difference between SKU vs UPC, and SKU management and best practices, why device an efficient SKU generator in your eCommerce business and make your inventory management hassle-free!

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Through our tools we make it easy to automate warehousing, allowing you to upload your SKUs so you can provide the most accurate rates at checkout. There’s more. We automatically sync your orders daily with the warehouse to completely automate the process. You select your couriers, and they will automatically be chosen based on the checkout options or your shipping rules.

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Looking for more eCommerce tips? Check out the following:

• 10 Common eCommerce Mistakes Sellers Make (and How to Avoid Them!)
• 10 Tips for Creating Great Product Pages to Drive Sales
• eCommerce Automation: How Technology Can Take Your Store to the Next Level