The Basics of Product SKU Fragmentation

A SKU (stock keeping unit) is a tool used in the field of inventory management as a specific product identifier.  It is a number or term that is assigned to individual retail products to identify price, product options, and manufacturer.  Different retail locations and sources of sale use different SKUs to identify products.  Unlike UPC codes, these are not universal or standardized, but in house specific.  SKUs keep track of inventory and each variant of a product has a unique SKU. 

Why are SKUs important? 

SKUs are important for store owners because they help you track your products through your inventory management system.  You can easily map your store based on category for a positive customer shopping experience or track products by type, collection, department, or vendor, making products easy to find.

Inventory management errors are one of the most common causes of profit loss.  SKUs help keep a record of how products are moving in and out to prevent theft.  You’ll also be able to tell when it’s time to reorder as well as be able to determine which products are selling through faster versus which you may want to discontinue.    

How do you generate your SKU? 

When choosing a SKU, consider how many products you carry and how many categories they fall into.  Start the SKU number with a top level identifier.  This can be a department, manufacturer, or whatever makes the most sense for you.  With just a glance, you’ll have an idea of what product set you’re looking at.  Use the middle set of numbers for unique identifiers. This can be size, color, or subcategory.  Finally, finish the SKU with a sequential number.  This can help identify older versus newer products within the line.

See the following example: 

CategoryCodeItem TypeCodeSKU Numbers: Category+Item Type+Sequential #
Jeans01Straight-leg1101110000, 01110001, 01110002
Jeans01Flare-leg1201120000, 01120001, 01120002

Alternatively, if you are selling online through ecommerce sites such as Amazon, you can create very simple identifying SKUs such as “Levi_jeans_straight” and “Levi_jeans_flare”.  Pick a system that is most effective for your needs. 

Why are SKUs becoming so universally used? 

In recent years, there has been a major explosion of SKUs.  This can be attributed to the move towards the use of 3PLs for logistics and supply chain functions.  According to Patrick Burnson, editor of Logistics Management and Supply Chain Management Review magazine, 68% of domestic Fortune 500 companies rely on 3PLs for inventory and supply chain management.  This turn to third party solutions creates demand for product identifiers to keep track of ordering and movement of inventory.  

While SKU numbers are intended to make inventory management easier, it’s not a perfect system and there are some challenges.  Depending on the type of product you carry and where you sell them, business owners may have to continuously update SKUs.  When you sell across multiple channels, you may have different requirements for SKUs or you may want to be able to track inventory based on individual SKU to see how they sell on individual channels.  This can become a time consuming process and you have to make sure that all SKU variations are listed within your inventory management system to ensure you are keeping accurate record of inventory.  If you are updating your product catalog and use a number system like we showed above, it may become difficult to create new SKUs while keeping within your previously established system of SKU generation.  

Generating SKU numbers for your products will be essential when implementing any type of inventory management system.  Be sure whatever system you choose, it is easily scalable as you add to your product catalog.  Be sure your SKUs are easy to understand and follow a system you can easily recognize.  Also check for SKU requirements across sales channels you will be utilizing beforehand to minimize the time you’ll spend adjusting SKUs.  This will help you track and manage all products in the most effective and efficient way.

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