What Is a Stock-Keeping Unit? Definition and Use Cases

Inventory management uses numerous technologies to track and organize inventory. If you work in logistics or retail, you may have heard about stock-keeping units. But exactly what is a stock-keeping unit, and why are these seemingly random codes so important to retailers?

Imagine running a shop where you had to track the details of every purchase by hand. You’d have to record the name and cost of every item and reconcile that information in logbooks jammed with details about shipments, inventory counts, and IOUs. Transpose a couple digits or write down the wrong brand name, and suddenly your log isn’t worth the parchment it’s written on.

Stock-keeping units (SKUs) are alphanumeric codes unique to each product in a company’s inventory. Retailers create and assign SKUs to products as they’re purchased and prepped for final sale.

Our deep-dive look into SKUs will show you how to improve your internal inventory management processes and keep up in the era of digital logistics.

Primary uses for SKUs

There are three ways SKU numbers typically help business owners streamline their operations.

1. Managing inventory

The primary purpose of SKUs is to help retailers monitor their inventory. They give business owners a clear-cut way to follow a product’s lifecycle and reliably track stock levels, orders, and inventory turnover.

2. Differentiating products

Retailers commonly stock several extremely similar items. One type of product may have countless variations. For example, a clothing retailer may carry the same men’s jeans in three inseam lengths and five washes. SKUs provide a way to differentiate each variation with a unique identifier. Now, they can track how many pairs they sold overall, plus sales for each variation.

3. Improving customer experience

Manually tracking products takes time and energy away from other essential internal tasks. Worse yet, it can inconvenience your customers. If a shopper is looking for a specific toy and wants to know whether it’s in stock, an employee can scan an SKU and look up the relevant inventory data much faster than they can search store shelves or rifle through a handwritten log.

SKU-based tracking is also faster, which could save a sale if you have an impatient customer who wants answers (and products) delivered ASAP.

4. Analytics

SKUs are designed to tie into various sales platforms and point-of-sale systems. Warehouse managers, stock assistants, and cashiers scan barcodes or type in SKUs and create another entry in that product’s history. You can then use your POS or sales forecasting software to better understand the following:

• Which products are trending
• Which products are selling slowly
• Which products may become dead stock
• How seasonality is affecting sales (holistically or in specific verticals)
• What quantities of certain items you should order to keep up with demand
• How you can better prepare for seasonal sales based on historical data

How to create SKU numbers

Before you can use SKU numbers for the products in your inventory, you’ll have to create them. This is most easily accomplished using your existing point-of-sale system or inventory management platform. Most have built-in SKU generation and management capabilities.

You can use your software’s automated options or use these best practices to create SKUs that adhere to industry standards and cater to your specific needs:

• Create your own SKU structure and stick to it. SKUs usually aren’t random; the amalgamation of letter combinations and number pairs correspond to inventory verticals or style options. For example, an SKU that reads TS-LB-M-US13 might stand for T-Shirt, Light Blue, Men’s, U.S. Size 13. Other products should follow the same structure so employees can figure out what a product is, even without a computer.
• Keep SKUs unique. All SKUs should be tied to a single product type and variant for life. Never reuse an SKU, even if you’re confident you’ll never get the original product back in stock. It will only confuse your team and muddy your paperwork.
• Stick with short SKUs. More information isn’t always better. It’s tempting to incorporate as much data as possible, but you needn’t include your store name or number as part of an SKU. Keep SKUs under 32 characters, and try to hit the sweet spot of 8–12 characters when you can.
• Print SKUs in a simple, straightforward font. Some fonts include decorative flourishes; these look nice but make certain characters appear shockingly similar. Avoid using characters that can be confused with one another, and ensure SKUs are legible.
• Use uppercase letters. Because lowercase "l" and uppercase "I" look the same (can you even tell which is which here?), it’s best to always write SKUs with uppercase letters.
• Avoid starting an SKU with a zero. SKUs that begin with zero can sometimes send inventory management programs into a tizzy. It’s best to avoid lead-off zeroes, just in case.
• No strange symbols. SKUs should contain only numbers and letters, with no punctuation marks or special symbols.

Where are SKUs found?

Now that you understand the value of SKUs, learning where to find SKU numbers can illustrate how widely used and practical these identifiers really are.

SKU examples are found in the following places:

• Retail and e-commerce: They are used to track products sold in brick-and-mortar stores and online.
• Logistics and warehouse management: SKUs help warehouse management systems track and communicate essential info, such as how products are organized and when it’s time to send a purchase order to replenish stock.
• Catalogs: They make it easier for customers and vendors to communicate about products with clarity and precision.
• Supply chain integration and EDI: When SKUs are attached to electronic data interchange (EDI) transaction sets, it clarifies which products are being bought, sold, and shipped, creating a valuable paper trail.

The importance of SKUs

SKUs are vital because they increase transparency and accuracy by ensuring crucial data is readily accessible. Stores that create and use SKUs can consistently generate reports detailing what’s selling and what isn’t. Your management and marketing teams can then leverage that data to increase revenue and boost profits.

Customers also benefit from SKUs. SKU-related reports help stores dial in their customer experience, better catering to customers’ needs and wants. They keep high-demand items in stock — knowing just when to order more — and avoid overstocking products that don’t serve the majority of shoppers.

SKU vs UPC

Now that you know what a stock-keeping unit is, you may be wondering about the difference between an SKU and a UPC. SKUs and UPCs live in the same world, but they aren’t the same thing.

A universal product code (UPC) is the 12-digit number under the barcode on a retail product. The number matches the barcode, offering another way to read and enter the product’s ID. You can either scan the code or type in the UPC.

The main difference is that SKU numbers are generated by companies and reserved for internal use, whereas UPCs are universal and remain consistent from retailer to retailer. Some stores use both UPCs and SKUs, but they’ll have different purposes. Other stores adopt UPCs as their SKUs, although that may become confusing.

Streamline your inventory management system with Orderful

SKU codes help optimize your workflow, improving everything from inventory tracking to order fulfillment. Whether you want to minimize shipping errors and simplify returns or increase accuracy throughout your supply chain, SKUs can help — especially when incorporated into an EDI solution.

Speak to an Orderful expert today to see how stress-free EDI integration can transform your business operations.