SKUs (stock keeping units)

Do you know what you have in your inventory right now? Could you tell how many of those navy blue, size small, men’s crew neck t-shirts you sold last month? Do you know what items are hot, and which ones are ready for the discount bin?

If you want to analyze—and improve—your sales performance, you need be able to take a good reading of your inventory. To do that, you need a system that allows you to identify each and every type of item you keep in stock.

What is a SKU?

A SKU is a unique ID code that you assign to every item on sale, explains Saibal Ray, Academic Director of McGill’s Bensadoun School of Retail Management.

Companies typically assign a SKU for every make, model, type, colour and size of product. Other identifying traits can also be taken into consideration depending on the products you sell.

“Each type of product has its own SKU code,” says Ray. “All the men’s white, three-quarter sleeve shirts, for instance, will have one SKU code. All the blue ones will have another. And so on and so forth, for everything you sell.”

How do you create a SKU number?

There is no unique, fixed method to generate a SKU, explains Ray. He says every company has its own system. Nevertheless, there are best practices to follow when creating your own SKU codes. Here are three important rules to follow:

1. Make it human-readable

SKUs are usually human-readable, meaning that an employee should be able to determine the characteristics of the product by quickly glancing at the code. For a clothing retailer, for instance, a small white t-shirt produced by the brand ACME for its fall 2022 collection may have a SKU code reading “ACME-F22-TS-WS.”

2. Make it standardized

Your SKU codes should be created according to a set formula.

1. Length
   While a SKU code can be of any length, it will typically have between eight and 12 alphanumeric characters. Longer SKUs increase the risk of data entry error.
2. Abbreviations
   SKUs will normally use abbreviations for product characteristics. For instance, “TS” can be used in place of “t-shirt,” and “W” for “white,” like in the SKU above (“ACME-F22-TS-WS”). Most importantly, those abbreviations will be uniform across items to ensure consistency.
3. General to specific
   A SKU code will often start will the most general characteristic of the product and end with more specific attributes. In the code “ACME-F22-TS-WS,” for example, the shirt type (“TS”, or t-shirt) comes before its colour and size (“WS,” or white and small).

3. Make it error-proof

Your SKU will be read by humans, but also by machines. Follow these three tips to avoid errors:

1. Never start a code with a zero
   When reading a code, computer software will occasionally skip a zero at the beginning of a string of characters. The code “011-ACME-HAT,” used for ACME hats in the style “011,” may thus be read as “11-ACME-HAT,” which might be an entirely different style.
2. Avoid look-alike characters
   Since SKUs are usually alphanumeric, both machine and human confusion can happen in reading certain numbers: a zero (0) could be mistaken for an “O,” an eight (8) for a “B” and a one (1) for an “I.” When possible, avoid letters that look like numbers.
3. Only use dashes as separators
   If you need to separate the different parts of your SKU code, do so with dashes. Never use a space, an asterisk, an ampersand or any other symbol or character (for example, “ACME*F22*TS*WS”). Even if you are a small business, with few products and you manage you SKUs manually, the reality is that many systems do not recognize those characters.

What’s the difference between a SKU and a UPC code?

UPC codes, the numbers found below a product’s bar code, are different from SKUs.

“UPC codes usually come from the manufacturer and are used across companies, while SKUs are unique to your company,” says Ray. “Typically, the two will be connected in your point-of-sale system.”

Key differences between SKUs and UPC codes

SKU (Stock keeping unit)	UPC (Universal Product Code)
8-12 characters (but can be any length) Alphanumeric	12 characters Numeric
Found above the barcode	Found below the barcode
Codes are unique to each retailer	Codes are same for all retailers
Human-readable	Not human-readable

How do you manage your SKUs?

Managing your SKUs, in other words, keeping track of your inventory, can be done in different ways.

For those with a very small business offering a limited number of products, some find a simple spreadsheet an appropriate option. But it’s best to digitize your inventory management process, to become more efficient and limit the number of errors.

“It is possible, for instance, to manage your SKUs using an enterprise resource planning software (ERP),” says Ray.

What is the right number of SKUs to have in a business?

Having many SKUs can sometimes be problematic, since it increases the complexity of your operations. There is not just the task of pricing each item, but the need to deal with an increasing number of orders and suppliers (as well as the space the products take up).

“The more SKUs, the more difficult your inventory becomes to manage,” says Ray. “You want to prevent your number of SKUs from exploding.”

Take toothpaste as an example. There are now a wide variety of brands and types available—with or without fluoride or flavours, with whitening agents, made for sensitive gums.

“If you sell toothpaste and you are not careful, you may find yourself selling 40 different types of toothpaste. This is probably too many”, says Ray.

So, how do you decide on the right number of SKUs?

“It’s a balancing act. You need to find the point at which increasing your SKU number will increase costs faster than it will increase your revenue,” says Ray. “That’s when you’ve attained the right number.”

What is SKU rationalization?

SKU rationalization is the process of cutting down on your products. To be more specific, it is the process of analyzing the items you currently sell in order to determine which ones are the most and least profitable, and which, if any, should be discontinued.

Choosing which item to keep, and which to discontinue, is sometimes challenging. The right number will vary from one company to another. Costco, for instance, offers consumers a small number of items in a given category. Amazon has the opposite strategy. It offers an array of options in each product category.

“The optimal number will depend on you business model,” says Ray. “Are you focused on variety? Quality? Customer service? This is what should guide you.”

Next step

Set key performance targets and find ways to improve your purchasing and supply strategies. Learn how by downloading this free guide: Inventory Management: A Guide for Entrepreneurs.