What is a SKU? How They Work and Examples

Businesses use SKUs to enhance their inventory management and supply chain process. But what is a SKU and how can you implement them?

A SKU, or Stock Keeping Unit, is a unique identifier for products that enable retailers and businesses to keep track of their inventory more efficiently. By using stock-keeping unit (SKU) numbers, companies can more easily locate and order products, as well as keep track of what items are selling and what items need to be restocked. In addition, using SKUs can help prevent theft and loss of inventory.

stock keeping unit SKU in a warehouse

Table of Contents

What Is SKU Number? Parts of SKU Number

SKU numbers are usually (not always) made up of three different sections. The first part is the top-level identifier, followed by middle digits, and ending with a sequential number. Often, SKU numbers use an alphanumeric code to help create unique identifiers for each product.

Critical Takeaway

There is no "standard" when it comes to the structure of SKU numbers. However, many companies adhere to the structure below.

An example of a SKU showing the possible structure of a SKU number
A table showing several examples of SKUs with their defining category

The first few characters in the code represent the broadest way to identify the item. This first identifier could be anything from a particular category (e.g., jeans vs shirts) to the department in a store (e.g., electronics vs clothing).

After the first section of a SKU number, subsequent sections of digits identify more specifics such as item type (e.g., men’s jeans), brand name (Levi), and color.

SKU vs MPN vs UPC. What is the difference?

If you are the product manufacturer or supplier there is no guarantee that your sales channel partners (e.g., e-Commerce, retail, or distribution) will adopt your specific SKU structure. This is because they usually have their own SKU structure that works for all their products across several manufacturers and categories.

In fact, many sales channel partners consider the SKU that you offer them (assuming you are the manufacturer) as an “MPN” which stands for “manufacturer part number”. There are a lot of reasons for this, but the primary one is that two different manufacturers can technically have the same SKU. Obviously, when this happens it creates a mountain of headaches for retail businesses. For this reason, many retailers or distributors simply create their own SKU system.

Critical Takeaway

SKUs may be adopted by channel partners, however, they are primarily used internally.

A UPC, however, is different. UPC stands for “Universal Product Code” and is a number that universally identifies a specific product. This is possible because universal product codes (UPC numbers) must be registered with a company called GS1. Therefore, all retailers or other sales channel partners can utilize them to identify products.

SKU Number Examples

Let’s look at some examples of how SKU numbers are used in practice:

Lee Clothing Brand SKU Example

The famous clothing brand, Lee, uses a 7-digit SKU number for its products. They print each of these on the label inside the product. Here you can see how Lee has divided their SKU into two distinct sections. The first section is 5-digits long and determines the style of the product. The second section is 2-digits long and determines the color of the product.

Lee's SKU number methodology
Lee's SKU number methodology. Source: Lee.com

Although they do also list the size code on the tag, it does not appear that is part of the SKU. A quick search on Lee’s website for the 5-digit SKU number in the image above revealed that the stock-keeping unit Lee had attributed to the product above in the photo has been replaced by another product. This is a common way of repurposing SKU numbers after products have been discontinued for some time.

Lee's website search function showing the SKU in use
An example of a SKU number replaced by another product.

A More Complex SKU Example

A popular projector screen brand offers its products in custom sizes, colors, and mounting variations. This results in 100’s of thousands of possible variations in their product portfolio. On top of this, they also offer each screen with a sub-set of over 15 screen material options. The SKU structure of this brand required a much deeper set of sections to accommodate the large possibilities of variations.

A more complex example of SKUs in use
A more complex example of how SKU numbers can identify products.

Another possible way that a company like this could accommodate an internal SKU structure is by randomizing each variation into a unique number. This creates an incredibly long list of SKU numbers that are not reverse engineerable. Finding your product requires either memorization or ready access to a system that can automatically spit out the SKU number relative to the particular selected variation (e.g., a really really long Excel sheet).

What are the benefits of using SKUs?

There are several benefits to using SKUs, which is why they’re used by businesses of all sizes. Let’s take a look at some of the top benefits: 

SKUs Help with Inventory Management

One of the biggest benefits of using SKUs is that they help with inventory management. When products have SKUs, businesses can quickly and easily scan them to see what’s in stock and what needs to be reordered. This helps businesses keep track of their inventory levels and ensure they always have the products their customers need.

SKUs Facilitate Online Sales

If you sell products online, then you know how important it is to have good product descriptions. When customers can’t physically see or touch the product they’re buying, they need as much information as possible to make an informed decision. That’s where SKUs come in handy. By including SKUs in your product descriptions, you can give customers all the information they need about a product before they make a purchase.

Here are some ways SKUs help online e-commerce businesses:

  • Easier product comparisons: This one is handy for customers. Have you ever gone into a store and seen two similar products side-by-side but couldn’t tell which one was better? Chances are, the difference was in the details—but those details were buried somewhere in the fine print. When products have SKUs, businesses can put all the important information right at customers’ fingertips so they can easily compare products and make the best purchase decision for their needs.
  • Simplified online ordering process: While more of a rare occurrence, some e-Commerce shoppers know the exact SKU of the product they want to purchase. This makes it very simple for them to place an order. Instead of searching through menus, they will usually enter the SKU into the search field on the website, then add it to their shopping cart and checkout.
  • Better search engine visibility: When businesses include SKUs in their product listings, it makes those products easier for search engines to find and index. This can help improve the visibility of your products in search engine results pages (SERPs), leading to more traffic and sales. In addition, using SKUs can help you rank higher for specific product keywords, which can result in even more traffic and conversions.
  • SKUs help with returns and exchanges: When a customer needs to return or exchange a product, having the SKU makes it easy to process this request. All you need is the SKU for the product that is returning, and you can quickly find it in your inventory.

SKUs Simplify the Entire Supply Chain

Because the SKU serves as the universal identifier for a product, they enable a much more streamlined supply chain process. Typically, the SKU is maintained from the engineering through the manufacturing, importing, inventorying, fulfillment, and even reverse logistics process. That is, assuming the product company performs all these steps in-house. As stated before, third-party sales channels may not use a SKU defined by a manufacturer.

Completing all these steps with a single unified SKU for each product ensures that all the data surrounding the product is also unified. This greatly simplifies the supply chain, especially for purchasing, and adjustments for quality or other potential issues.

How to Create a SKU for Your Products

Creating a SKU (Stock Keeping Unit) for your products might sound daunting, but it’s actually a pretty straightforward process. Before you get overwhelmed, just remember a SKU is simply a code that you assign to each of your products so you can keep track of them more easily. Here are the steps for creating a SKU:

Decide on the format of your SKU

The most important thing is that the format is consistent across all of your products. A common format is to use a combination of letters and numbers (e.g., ABC123).

Assign a unique code to each product

This can be as simple as using the product’s ID number or name. For example, the letter “T” for t-shirts or “M” for Men’s clothing.

Use a consistent code for each product variant

For example, if you have a t-shirt that comes in two colors and three sizes, you would use the same first section SKU code for all six variations of that product. The subsequent sections should use the same SKU code as well. For example, all red shirts should have the same code for the “red” variant.

Add the SKU numbers to your product listings

This will help you keep track of your inventory and make it easier for customers to find the products they’re looking for.

Test the SKU system!

Once you’ve created your SKUs and added them to your product listings, it’s time to test out the system to make sure it’s working properly. Try placing an order for one of your products and see if the correct SKU appears in your order confirmation email or on your packing slip.

How to Use SKUs in Your Business Inventory Management

Once you have assigned SKUs to your products, you can start using them in your inventory management system. If you are using paper-based records (really, are there still businesses doing this? No judging here, but you should strongly consider updating to a digital inventory system) be sure to update your inventory sheets with the new codes. If you have an electronic system, you will need to input the SKUs into the database. Either way, it is important to keep accurate records of your inventory levels so that you can quickly identify when it is time to reorder products.

Once you have the SKUs in your system, you can implement them throughout your sales network. This may include an e-Commerce store, retail stores, or distribution centers. This is where discussing with these partners beforehand becomes super beneficial. If you decided on a SKU system before understanding your sales channel’s capabilities, you may shoot yourself in the foot when you find out they can’t use your SKUs.

Key Takeaway: Implementing SKUs

  • Input SKUs into your digital inventory system.
  • If you don't have a digital inventory system, get one 🙂
  • Distribute your SKU information to sales channel partners and distributors

Tips for Choosing the Right SKUs for Your Products

Trying to avoid improperly structuring SKUs is probably where most of the anxiety comes from when businesses undergo the process of assigning SKU numbers. However, assigning SKUs doesn’t have to be cumbersome! Here are a few tips to help you choose the right SKUs for your products.

  1. Keep them short and simple. When it comes to SKUs, less is more. You want a system that is easy to understand and use, so resist the urge to get too creative with your SKUs. Avoid using special characters or anything that would require extra explanation. A good rule of thumb is to keep your SKUs to 7 characters or less. No one wants a 20-digit SKU, and the longer your SKUs become, the more likely your sales channels or other partners are unable to use them!
  2. Make sure they are unique. This may seem like a no-brainer, but it’s important to make sure that each of your SKUs is unique. Actually, this is the entire purpose of a SKU. That is, a UNIQUE identifier for your product. Making your SKUs unique ensures there is no confusion when tracking inventory or trying to locate a specific product. If you’re having trouble making unique identifiers, you may need to include more digits or a combination of letters and numbers.
  3. Use a consistent format. Once you’ve settled on a format for your SKUs, it’s important to be consistent with it across all of your products. This will make things much easier when inputting data and running reports later on. If you have multiple product lines, you may consider using a different letter or number at the beginning of each line’s SKUs to help keep things organized. 
  4. Try to think about the future. Do you plan to develop a new type of product that will need a unique way to identify it? Sometimes (not always) it helps to think about your future product plans so you can accommodate the unique identifier into your global SKU structure.
  5. Do not make your first SKU digit the number 0. Data systems often interpret a leading digit of 0 as “nothing”, which will cause incorrect interpretations of the SKU number.
  6. Make your first SKU digit a letter. Starting your SKUs with letters helps make them easier to quickly interpret in digital inventory systems and even Excel spreadsheets. It provides an easy visual cue for the main category assigned to each SKU.
  7. Don’t use letters and numbers that look similar. It is best to not use letters that look like other letters or numbers. This helps reduce potential errors when manual SKU entry happens. Additionally, it also helps quickly identify SKUs without the potential confusion between similar letters and numbers. Probably the most prominent example of this is distinguishing between the number 0 (zero) and the letter O. Both appear similar, but if a staff member must identify a SKU with the potential for both to be present, it can cause errors and extra time consumption.
  8. Include major stakeholders. I can’t stress this tip enough. Make sure that you include stakeholders inside (and outside) your company when determining SKU structure! This is vitally important to developing a system that will work for all the departments of your company, as well as the sales and supply chain channels outside your company. Some of the most vital departments to consider including are: warehouse managers, marketing, and product development teams. Outside partners may include e-commerce stores, retailers, manufacturers, and distributors.
Key Takeaway: What makes a good SKU?

A good SKU is short, simple, unique, and consistent. When making SKUs, consider your future product goals, and include key internal and external stakeholders.

Summary: Should I implement SKUs in my business?

If you’re not using SKUs in your business, you should consider doing so. They help with inventory management, e-Commerce sales, and more. To make the most out of SKUs, be sure to create unique identifiers for each product, use a consistent format, and include key stakeholders when creating your SKU number structure.

Remember, SKU numbers are primarily internal identifiers for your products. However, if your structure is simple and easy to follow, you may gain adoption by other sales channel partners. If you run your e-Commerce website, you should definitely implement SKU numbers to aid your customers and track your inventory.

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