Last Updated On December 01, 2020 / Written By Hanh Truong

SKU in Supply Chain Management- Definition & Tips

A stock-keeping unit, or SKU, in supply chain management, refers to a scannable code printed on product labels. They are used to identify and track the movement of inventory items.

Inventory tracking can be simplified with the implementation of stock-keeping units (SKUs). These are unique product codes that can be used to digitally identify certain inventory items that a vendor or supplier has on hand in their warehouses.

Setting up SKUs can enhance supply chain management because it allows businesses to replenish stock to optimal levels, identify best-selling products, and monitor their overall profitability.

SKU vs. UPC

A stock-keeping unit is a compilation of numbers and letters that can be scanned to track an item's location. It can also be used to show a product's information, such as its manufacturer and pricing.

Unlike universal product codes (UPCs), which are also barcodes used to identify items, SKU numbers are not universal. SKUs are unique to individual retailers, which means that each company will have a different set of SKUs for a product. Therefore, an item that has the same UPC can also have two different SKUs assigned to it by two different stores.

Businesses that have more than one location or purchase stock from various suppliers will generally use SKUs to optimize their inventory management. For example, if the same type of product were kept at three different warehouses, retailers would create three distinct SKUs. This will enable them to effectively and quickly identify the product's movement in its different locations.

How SKUs are Used

With its accessibility, SKUs can streamline a variety of business processes, such as-

Order Processing

SKUs can help retailers determine the most profitable way to move or ship inventory by allowing them to create algorithms based on specific standards, such as the lowest freight cost.

This is beneficial for distributors or manufacturers with multiple inventory locations, as the SKU can help them compute whether a new purchase needs to be back-ordered or if the stock should be shipped directly from a specific warehouse.

Supply Chain Management

Once a product's SKU is scanned to fulfill a sales order, the item quantity is deducted from the inventory. This enables retailers to monitor the level of stock items they have on hand in real-time. It is necessary to consistently track inventory levels to ensure that purchase orders are made promptly when an item is low on stock.

Additionally, SKUs can be used to track the movement of stock between warehouses or the route to its delivery location. This gives businesses full visibility into their inventory, which will help management make informed decisions about replenishment and order fulfillment.

Data Analysis

SKUs can provide data about shrinkage rates and popularity, as well as inventory turnover, which is the number of times a business has sold and replaced products during a given period.

This information is valuable for companies, as it can be utilized to improve profitability and productivity.

Marketing

Most online retailers will use SKUs over UPCs as product identifiers. Since SKUs are unique, companies can use and promote a product code that customers will not be able to find anywhere else.

On the other hand, if the UPC is used, shoppers can easily search the code online and compare prices from competitors.

5 Tips to Create SKUs in Your Supply Chain

Retailers have the flexibility to create their SKU codes without having to adhere to specific standards. Some tips for establishing practical SKUs include-

1. Determine the Length and Detail

The length of an SKU generally depends on how much product detail is included in the code. Businesses will usually include information about the product's manufacturer, size, and color.

Product categories can also be created and included in an SKU number. For example, a textile distributor may use the letter C for curtains and the letter B for blankets.

To further demonstrate, the aforementioned company may use the SKU GG4070C. The letters "GG" indicates green fabric, the number "4070" specifies that the size is 40x70 inches, and the letter "C" means the product is a curtain.

By including key details in an SKU, it will make it easier for staff to find the exact product variant when necessary.

2. Customize SKUs to the Company

Since SKUs are only used internally, they should reflect information related to the product or company. This will ensure that the code is unique to a business and will be less likely to be replicated by other establishments.

3. Make Sure SKUs are Legible by Humans

Floor staff and warehouse employees should be able to read and understand SKUs and the important product information that it entails. Doing so will make it easier and quicker for team members to identify products in their store or storage facility.

4. Avoid Starting With Zeros

When creating SKUs, avoid starting the code with the number zero. Some types of data processing software will ignore or cut off zeros in numeric fields. Therefore, businesses that have SKUs that begin with zeros may risk encountering issues when collecting or retrieving data.

5. Use Code Generators

To simplify the process of making unique SKUs, businesses can use online code generators. These tools will automatically create SKUs based on classifications and product information that a retailer inputs.

Creating and using stock-keeping units can help improve multiple business functions, especially supply chain management. These unique codes can improve inventory control and simplify how products are identified in a warehouse or store.