SKU: How Stock Keeping Units Work + Examples

Updated Oct 25, 2022.
Stock Keeping Unit

A good inventory management system is crucial for your business to thrive and compete against other ecommerce businesses.

Businesses have come up with unique identifiers in the form of a code that help them track inventory for the smooth running of their business. This unique code is referred to as Stock Keeping Units (SKU).

If you are a business owner needing an effective inventory system, understanding how stock-keeping units work and the benefits it serves your business will make your products or services stand out even amongst your competitors.

This guide teaches you the basics of Stock Keeping Units (SKUs) that will enable you to manage your inventory easily.

What is a Stock Keeping Unit (SKU)?

Stock keeping unit is a scannable barcode containing letters and numbers, usually eight characters, labeled on a product alongside its Universal Product Code (UPC).

You commonly see SKUs in retail stores, warehouses, product fulfillment centers, shopping malls, online stores, and every other business dealing with inventory. SKU stands for a stock-keeping unit.

SKUs are unique identifiers manufacturers and retailers use to differentiate a particular item or stock from other stocks for easy access and tracking. Different companies have their unique ways of creating SKUs.

This code contains product details such as size, model numbers, brand, manufacturer, color, and warranties.

SKUs help businesses track and manage inventory when accounting for each stock unit after a given period, either for a restock or for a financial analysis of the product.

A company's SKU will have a different barcode from its competitor's SKU because it is a unique code only accessible to the company and its customers, unlike the UPC barcodes, which remain the same irrespective of the product or manufacturer.

For example, purple ugg boots size 15, the color blue, brand (Gucci) may have SKU information such as this: PB-15-BLU-GUC.

Consequently, another company with the same product and product characteristics will have a different unique SKU like this: UB-VER-15-WH.

Stock Keeping Unit (SKU)
Source: ERPNext

Purchased or manufactured goods should contain a Universal Product Code (UPC) from the Global Standard Organization (GSI) on the print label for product identification.

Retailers can create their internal SKUs if they choose not to use their manufacturer's UPC barcode as product code, which is a preferable way for internal tracking of their inventory. UPC codes contain a 12-digit numeric code. 

Where Are SKUs Used?

SKU codes are essential to businesses managing their inventory. Both large, medium, and small-scale businesses incorporate Stock Keeping Units (SKUs) into their product print labels for a swift check-in inventory.

Supply chain companies actively engaged in the inventory management process need a unique identifier for their own products because of the volume of stock they handle for more accurate tracking of their inventory levels.

You can use SKUs in the following businesses.

  • Retail stores (Supermarkets inclusive)
  • Ecommerce vendors (e.g., Amazon) 
  • Warehouses
  • Product fulfillment centers or houses
  • Catalogs
  • Manufacturers

Why Are SKUs Important?

Stock-keeping units offer many advantages to active participants in the inventory management system. These participants include retailers, warehouses, manufacturers, and product fulfillment centers. SKU barcodes are crucial for businesses.

1. Increases Profit by Triggering Purchase Orders

SKUs allow retailers to take strategic actions such as positioning products in platforms (both online and offline) that are reachable to their target audience.

2. More Accuracy in Inventory Management

SKUs help in product tracking, revealing data entries such as time of purchase, sales price, point of sale (POS), stock levels, and many others that can help the product's financial analysis.

5 Benefits of inventory management
Source: ET Retail

3. Helps with Products Differentiation

A good SKU system helps different online retailers easily manage their inventory, as different and similar products are differentiated with unique SKU codes.

Products differentiated by SKU barcodes help customers go for what they want at a glance during purchase without struggling to identify their preferred products.

4. Unique Identifiers

Online stores selling the same item use SKUs to differentiate their products from their competitors. For example, e-commerce giants like Amazon create SKU codes that are typically unique for their own product print labels that their customers can easily identify.

An online store owner can use SKU codes to differentiate different products when selling on eCommerce platforms like BigCommerce, Shopify, Squarespace, Shift4Shop, and Zyro.

How Do SKUs Work?

In inventory management, stock-keeping units help differentiate products with similar descriptions and determine different customer segments in the long run.

Point of Sale (POS) software finds it difficult to track sales and products without knowing their make, materials, brand, color, size, and other product characteristics. 

Companies develop SKU systems that help them easily track sales, unit economics, and inventory. As there is no incorrect way of creating SKU systems, each retailer can create their own SKU based on their product needs and specification.

The SKU number of a product contains all essential characteristics, such as model number, warranty terms, price, material, size, color, and other relevant factors. 

These inventory management SKU tips will help you create a good SKU that is simple to read by the Point Of Sale (POS) software and your customers while meeting your products' needs.

  • Keep Your SKU Numbers Short: Some inventory management software may find it difficult to read long SKUs.
  • Avoid Using Special Characters When Creating Your Product SKUs: Using special characters when creating your product SKUs can confusion.
  • Do Not Use Letters that Look like Numbers: Customers can easily mistake certain letters like l and O as 0 and 1. You can avoid this mistake by avoiding such letters.
  • Create SKUs Based on Your Product Specifications: A purple ugg boot white color with a price tag of $40 can have an SKU number as this: PUB-MS-40-WH. PUB is purple ugg boots, MS is medium-sized, WH is the color white, and $40 is the price.

 How are SKUs Formed?

You can manually create stock-keeping unit barcodes for your products or use retail POS or inventory management software. Whichever way you create SKU is fine, provided you follow these easy steps when creating your product SKUs.

1. Use Top-Level Identifiers

Using top-level identifiers like department stores, product names, and sizes will make it easier for you to identify specific products from similar ones.

2. Apportion Unique Top-Level Identifiers at the Center of SKU Numbers

Product features such as color, materials, and size, and whatever feature is entirely readable, can be allocated in the middle section of the SKU numbers of your product.

3. Specify Varying Products the Same with Unique Variation Identifiers

If you sell products in different sizes or colors, variation identifiers are most helpful in distinguishing the products.

For example, a variation identifier for your products can take a format like this:

  • Bailey bow style color blue size-medium = BBS-40-BLU-M
  • Bailey bow style, color red size-large = BBS-40-RED-L

4. Use Sequential Numbers to Complete SKUs

Adopt the use of sequential numbers like 001, 002, and 003. Because they are quite helpful in identifying older versions of your stock from newer versions as they are in series.

5. Compile SKUs to Your POS Software or Inventory Management System Software

After successfully creating product SKUs, the next is to add them to your retail point-of-sale software for easy inventory tracking.

Inventory in the Manufacturing Cycle

6. Create the Barcode Labels for Your SKU Products

Creating a scannable code using a barcode generator is necessary after adding your SKU codes to your inventory software.

On the other hand, automated inventory management or POS system will automatically create a scannable code after you enter SKU codes for your products.

Successful SKU creation is easy when you follow these steps promptly. You will have your SKUs ready for printing on your product print labels.

Examples of Constructing an SKU

For example, Joe, a retail store owner, sells two varieties of T-shirts: long sleeve round neck T-shirts and long sleeve collar neck T-shirts.

Each of the T-shirts has varying product characteristics. The long sleeve T-shirt's round neck has the following product characteristics as color yellow, the small-sized brand (Nike), and the manufacturer's model number – 035.

The SKU information of retailer Joe's first long sleeve T-shirt (round neck) will look like this: TL-YEL-S035-NIK-SML. 

Where:

  • TL for T-shirt
  • YEL for the color yellow
  • S035 for manufacturer's model number
  • Nik for brand name (Nike)
  • SML for size (small)
  • Dashes to separate the product-specific information

The long sleeve collar neck T-shirts have the following product descriptions: black, medium-sized brand (Versace), and manufacturer's model number – 035.

The SKU information of retailer Joe's second long-sleeve t-shirt (collar neck) will look like this: Tl-BLK-S035-GV-MED.

Where:

  • TL for T-shirt
  • BLK for the color black
  • S035 for manufacturer's model number
  • GV for brand name(Gianni Versace)
  • MED for medium
  • Dashes to separate the product-specific information

With the above relevant SKU information of Joe's two varying T-shirts (round and collar neck), it is unique and easy to locate a specific T-shirt during purchase orders by Joe's customers at the point of sale.

Example of SKU code formation
Source: RubyGarage

Stock Keeping Units Vs. Universal Product Codes 

SKU represents a company's internal product codes (8 characters and above) that you can create for product recognition.

When supplier vendors deliver purchase orders to retail stores, there is always a Universal Product Code (UPC), strictly 12 numeric digits generated by Global Standards Organization (GSI) in the product label.

These numeric 12 digits codes are the same barcode printed on every product irrespective of retailers purchasing such products, which is for item identification purposes.

Here are the distinguishing factors between SKUs and UPCs.

  • SKUs are for internal purposes, while UPCs are for external purposes.
  • SKU numbers are usually 8 to 12 characters (numbers & letters), but UPCs maintain strict 12 numeric digits.
  • You can create SKU numbers using your product specifications as unique identifiers, but GSI creates UPCs.
  • The SKUs you create is free for your retail stores, unlike the UPC barcodes, where you have to pay a certain amount per item.
  • A good SKU you created can be read and interpreted by humans (your customers). On the other hand, UPC numbers can not be interpreted by humans.

Frequently Asked Questions

Is a Barcode an SKU?

Barcode numbers and SKUs are similar but not the same. The difference is that while SKUs are alphanumeric characters and can be interpreted by humans, UPC barcodes are numeric characters that humans can not interpret until they are subjected to a scanner.

How Can I Get an SKU for My Product?

Creating SKU numbers can be done manually or through inventory management systems or POS software, as they are company-specific identifiers, unlike standardized UPCs.

What is the Difference Between an SKU and a Serial Number?

SKUs are quite different from serial numbers. While serial numbers reveal product ownership, SKUs go beyond product ownership to product characteristics or descriptions.

Product groups with the same characteristics will use the same SKU. In contrast, every product will have a unique serial number that differentiates it from other products, even in the same group.

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Martin Luenendonk

Editor at FounderJar

Martin loves entrepreneurship and has helped dozens of entrepreneurs by validating the business idea, finding scalable customer acquisition channels, and building a data-driven organization. During his time working in investment banking, tech startups, and industry-leading companies he gained extensive knowledge in using different software tools to optimize business processes.

This insights and his love for researching SaaS products enables him to provide in-depth, fact-based software reviews to enable software buyers make better decisions.