Master your inventory: the art of creating effective SKUs

Inventory is at the heart of any manufacturing, retail or distribution business. Understanding how SKUs work, and the different strategies for structuring them, is the basis for successful management and growth. The impact of these few characters is more significant than most managers realize. Whether in terms of efficiency, team understanding, or communication with more administrative departments, choosing your SKU strategically will enable your company to do more with less.

What is an SKU?

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

Given the internal nature of the SKU, there is no universal format to respect, nor any constraint as to the SKUs used by other companies. The only constraint is the uniqueness of the SKU within your company, i.e. it cannot be repeated in exactly the same way for a second item. Here are a few examples of SKUs that would all be valid:

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

Creating SKUs for my company

Creating effective SKUs for your company involves more than just randomly grouping letters and numbers together. There are several best practices for maximizing the impact and trackability of your SKUs in inventory.

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

• Hierarchical: The format must have a hierarchical sequence, generally going from the highest-level information to the most detailed.
• Concise: The format must be relatively short and uncluttered, so categories and other information are replaced by alphanumeric code equivalents. It's often advisable to aim for between 8 and 12 characters, but there are no strict constraints at this level.
• Informative: The format must prioritize the most structuring information and think about future evolution.

Once the nomenclature has been established, we need to define the conversion matrix for each group of information, and replace the generic format with the product detail. At each stage, it's important to ensure that the SKU generated is unique.

Example #1: Outdoor home accessories manufacturing company

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

The most important information at hierarchical level would probably be the particular status of the item, i.e. used in a different department, e.g. "Accessories prepared" section, "Boxes completed" section, "Raw materials" section, etc. Next, we'll explore 2 or 3 other levels of detailed information.

After this deconstruction work, here's the structure we've identified: Item status > Product type > Main characteristic variant > Detail / Product number.

Next, we'll build the conversion matrix. For illustrative purposes, this has been simplified.

Once the conversion matrix has been designed, it's now possible to create individual SKUs. For example, BOX-PRES-STL-001 would represent the completed box, prestige model of forged steel variant, specification 001.

This format makes it easier to communicate with the rest of the team, including customer service. If, in the future, a new model or variant were to be added, the format would make it easy to integrate this new feature.

Example #2: Clothing distribution company

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

For example, SPO-NK-M-1503 would represent the sports department, the Nike brand, the "Male" gender and the specific product. It's also common to find size or variant information on the SKU.

Good housekeeping practice for nomenclature

For those who already have active SKUs, it's 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 the time comes to add new products, the process remains efficient, easy and consistent with the 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's easy to generate the corresponding SKUs automatically, and then import them into your inventory management or ERP system.

An example of an Excel file for compiling SKUs has been appended for free download.

SKU vs UPC

The SKU is a unique identifier for internal company use, but it does not guarantee international uniqueness. The UPC, Universal Product Code, is a universal identifier issued by the Global Standards Organization. The UPC format also has a few different properties to the SKU, notably:

• 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 almost 1,000 billion unique values.

The UPC is useful when a producer or distributor wishes to extend its distribution chain to large retailers or distributors, who often require a valid UPC in order to place the appropriate barcode.

How can I use my SKUs?

1. Inventory tracking & metrics

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

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

Similarly, once this information is available, there are a number of additional performance metrics to guide the company towards more informed decisions and proactive measures.

2. Clear communication

As mentioned above, the larger the company, the greater the number of products and the less informed the team is about each of the possible variants, especially support departments not directly involved in inventory or product management. Having well-thought-out SKUs ensures clarity for all stakeholders, greatly facilitates communication, and provides a general understanding of what makes up the items.

3. Barcode

Although the UPC (or EAN) is generally used as the international standard for generating a barcode for large retail chains, it is perfectly 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.

So there are several advantages for a company in generating its own barcodes (in either 1D or 2D format).

• Speed up stock-taking
• Prepare the shopping basket at the physical checkout
• Simplified 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.

SKU limits

Although SKUs are, in the vast majority of cases, an excellent way of tracking inventory, certain contexts prevent their proper use. Let's take the example of a custom furniture manufacturer with 2000 basic products. However, each of these products can be customized on ten or so parameters, and each parameter has fifteen or so options. For example, you could customize the width of the sofa, you could select the color of the back, and so on. With 2,000 products, 10 parameters and 15 options on average, where you must necessarily select one option per parameter, we're talking about 576 billion possible variants per product, for a total of 1.1 million billion combinations.

Number of total combinations = Nb_of_products * nb_options^nb_parameters = 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 unrealistic, both for a human and for a software system. We therefore need to employ different strategies to enable these orders to be managed and tracked easily by the factory team, while retaining the ability to analyze metrics and performance. The development of a tailor-made ERP management system can address these issues, while optimizing use by the entire company.

Conclusion

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

By adopting best practices in SKU creation and BOM maintenance, you'll strategically position your company to better measure and meet its performance objectives as you move into the next stage of your growth.

Appendix

Download link to SKU sample file: Generate SKUs