Master Your Inventory: The Art of Creating Effective SKUs

Inventory is at the heart of manufacturing, retail or distribution companies. At the heart of successful management, understanding how SKUs work and the different strategies for structuring them is a guarantee of successful growth. The impact of these few characteristics is more significant than most managers think. Whether in terms of efficiency, understanding on the part of the team, communication with more administrative departments, choosing your SKU strategically will allow the company to do more with little.

What is a SKU?

A SKU stands for Stock Keeping Unit. It is a unique identifier, specific to the company, that allows it to distinguish all the units that need to be kept in a formal inventory account. A SKU is therefore a relatively short string of characters, whose format is very flexible and which allows the team to differentiate with absolute confidence all its items held in inventory.

Given the internal nature of the SKU, there is no universal format to follow or constraint on the SKUs used by other companies. The only constraint is the uniqueness of the SKU in your company, i.e. it cannot be repeated in exactly the same way for a second item. Here are some examples of SKUs that would all be valid:

1. Use numbers only: 853459394
2. Use only letters: ABCOOAS
3. Use numbers, letters and distinguish logical blocks with a hyphen: FG-3412-PLA-550

Create my SKUs for my business

Creating effective SKUs for your business isn’t just about randomly grouping letters and numbers together. There are several best practices to maximize the impact and ease of tracking your SKUs in inventory.

The first step is to structure the generic nomenclature of all its SKUs. There are three main objectives to respect:

• Hierarchical: The format should have a hierarchical sequence generally going from the highest level information to the most detailed.
• Concise: The format should be relatively short and uncluttered, so categories and other information are replaced with an alphanumeric code equivalent. It is often recommended to aim for between 8 and 12 characters, but there is no strict constraint at this level.
• Informative: The format must prioritize the most structuring information and think about the evolution of the future.

Once the nomenclature is established, it is necessary to define the conversion matrix for each of the information groups and replace the generic format with the product detail. At each step, it is important to ensure that the generated SKU is unique.

Example #1: Home exterior accessories manufacturing company

First, I need to identify what information is most relevant to design my generic BOM. In this business, there is a complexity because some items are only used for transformation purposes in the factory, while others are for final sale to customers. For the business, it is important to keep an inventory of all these parts and items in the form of a SKU.

The most important information at the hierarchical level would probably be the particular state of the item, i.e. used in a different department, for example, the "Prepared Accessories" section, the "Completed Boxes" section, the "Raw Materials" section, etc. Subsequently, we will explore 2 or 3 other levels of information detail.

After this work of dissection, here is the identified structure: Item status > Product type > Main characteristic variant > Detail / Product number.

Next we will build the conversion matrix. For example purposes, this has been simplified.

Once this is designed, it is now possible to create each of the SKUs. For example, BOX-PRES-STL-001 would represent the completed box, prestige model of forged steel variant, specification 001.

This format is therefore easier to communicate with the rest of the team, including customer service. If in the future, a new model or a new variant were to be added, the format would easily allow the integration of this new feature.

Example #2: Clothing distribution company

Without going into as much detail as the previous example, it is important to understand that the primary and accessible information may vary from one company to another. For example, the nomenclature for the clothing category might be Department > Brand > Gender > Product Detail for a company with tens of thousands of SKUs and several primary departments.

So, we could find SPO-NK-M-1503 which would represent the sports department, the Nike brand, the gender "Male" / Homme and the specific product. It is also common to find the size or variant information on the SKU.

Good Conservation Practice for Nomenclature

For those who already have active SKUs, it is important to keep track of their generic format and conversion matrix, either in an internal document (Excel, etc.) or in dedicated software. This way, when it comes time to add new products, the process remains efficient, easy and consistent with the already existing list.

For those at the SKU definition stage, it is possible to build an Excel file containing the structuring information and their equivalence matrices to remember the appropriate codes. Thanks to a simple formula, it therefore becomes very simple to generate the corresponding SKUs automatically and then import them into your inventory management system or ERP .

An example Excel file for compiling SKUs has been attached for free download.

SKU vs UPC

The SKU is a unique identifier specific to the internal use of the company, however it is not a guarantee of its uniqueness internationally. The UPC, acronym for Universal Product Code, is a universal identifier issued by the Global Standards Organization . The UPC format also has some different properties than the SKU, including:

• The UPC must always be 12 characters long.
• The UPC is made up of numbers only.

Interestingly, this combination of 12 numeric characters for the UPC allows for a total of nearly 1 trillion unique values.

The UPC is useful when a producer or distributor wants to expand their distribution chain to large retailers or distributors who often require a valid UPC to put the appropriate barcode.

How do I use my SKUs?

1. Inventory tracking & metrics

The primary purpose of a SKU is to ensure the tracking and inventory count of an item (raw, processed or finished product). Here are some benefits of tracking your inventory in more detail:

• Know your inventory value at all times
• Estimate delivery times when a customer orders a back-order product
• Plan your purchases from your suppliers at the best time
• Calculate inventory turnover performance
• Measure losses and breakages over a given period

Likewise, when you have this information, there are several additional performance metrics that can guide the business towards more informed decisions and proactive measures.

2. Clarity of communication

As mentioned earlier, as the company grows, the number of products increases and the team becomes less aware of each possible variation, especially support departments that are not directly involved in inventory or product management. Having well-thought-out SKUs ensures clarity for all stakeholders, greatly facilitates communication and allows for a general understanding of what the items consist of.

3. Barcode

Although the UPC (or EAN) is generally used as an international standard to generate a barcode for large retail chains, it is entirely possible to generate barcodes for your own products with your SKU. As a reminder, a barcode is a representation of characters in visual format. The barcode, often considered traditional, is the 1D version which can represent from a dozen to around 80 characters depending on the standard used. There is also the 2D version (often represented by a QR code) which can store more than a thousand characters.

Generate barcodes yourself with our free tool here

There are therefore several advantages for a company to generate its own barcodes (regardless of the 1D or 2D format).

• Speed up inventory taking
• Prepare the shopping cart at the physical checkout
• Easy access to product information and location

With the right SKU nomenclature, a modern ERP solution or inventory management system can easily issue a barcode or QR code.

The Limits of SKU

Although SKUs are in the vast majority an excellent way to track inventory, some contexts prevent its proper use. Let's take the example of a custom furniture manufacturer that has 2000 basic products. However, each of the products can be customized on about ten parameters and each of the parameters has about fifteen options. For example, we could customize the width of the sofa, we could select the color of the back, etc. With 2000 products, 10 parameters and 15 options on average where we must necessarily select one option per parameter, we are talking about 576 billion possible variants per product, for a total of 1.1 million billion combinations.

 Nombre de combinaisons totales = Nb_de_produits * nb_options^nb_paramètres = 2000 * 15^10 = 2000 * [576 650 390 625] = 1 153 300 781 250 000

In cases of advanced customization, we quickly realize that managing this inventory of SKUs is not realistic, both for a human and for a software system. It is therefore necessary to use different strategies to allow the management of these orders, easy tracking for the factory team while maintaining the ability to analyze metrics and performance. The development of a tailor-made ERP management system can help address these issues while optimizing use by the entire company.

Conclusion

Although seemingly simple, the SKU is much more than just a few alphanumeric characters. It is the foundation of a well-designed structure and rigor in the management procedures of a company.

By adopting best practices for creating your SKUs and maintaining your nomenclature, you will strategically position your business to better measure and meet its performance objectives towards the next stage of your growth.

Appendix

Download link for the sample SKUs file: Generate your SKUs