What Is SKU and Why Is it Crucial for Effective Inventory Management?

Stock Keeping Unit (SKU) is a unique code that you use to identify each inventory item in a warehouse. Unlike universal product codes (UPCs), SKUs are not universal, meaning that each business has its own set of SKUs for its merchandise. This means that a product with the same UPC can have two different SKUs from two different sellers.

SKUs are also unique and specific to each location. For example, if you have one product stored within two warehouses, you will need to create two different SKUs to allow for efficient inventory management.

Each SKU is associated only with stock that is available right now and doesn’t include backordered stock to replenish the SKU in your warehouse. For this reason, SKUs are a key part of your inventory optimization strategy.

 

Creating SKUs

SKUs are meant to be human readable. Ultimately, your SKU is a shorthand way to record important product information, so the easier they are to understand, the quicker it will be for your floor staff to identify products.

SKU codes should help you identify the exact product variant you are looking for. Therefore, you should incorporate information on colour, type, size and any other significant variants into the SKU. It also makes a lot of sense to create the SKU code beginning with the most important information, followed by less significant attributes. 

 

Inventory Management

Making an accurate estimate of inventory can mean the difference between profit and loss. Not stocking enough inventory of popular items can be as damaging as trying to offload overstocked products. Moreover, inventory availability ultimately impacts your customers perceptions of your business.  

Inventory management is the process of end-to-end tracking stock, from ordering, receiving and stocking to packing and shipping products. Having a full understanding of how much inventory they have as well as how much they need to fulfil upcoming orders allows companies to maintain adequate stock levels. Forecasting and planning are crucial to responding promptly to clients’ demands and ensuring profitability.

Every product variation has a SKU, meaning every item you're selling has its own unique code. Organizing and identifying products using SKUs facilitates reconciliation of stock levels, significantly reducing inventory shrinkage.

Moreover, inventory categorization with SKUs enables greater visibility of stock movements and helps identify where and how stock has gone missing, minimizing the opportunity for unaccounted missing items or theft. Additionally, SKUs facilitates identifying the quantity of on-hand stock. You can then set a threshold and reorder point for each product variant, indicating when a new purchase order needs to be made.

Choosing the right technology is critical to making the most of your SKU-based inventory management processes. Outdated manual systems no longer provide the efficiency and accuracy needed to maintain supply chain and warehouse operations. A Warehouse Management System will

 

Tracking Profitability – SKU Proliferation X Rationalization

While SKUs can be beneficial in terms of identifying products, having too many of them can lead to an overall complex business operation. With SKU management you can analyse the cost of producing and stocking against the profit generated by each unique inventory item. This analysis can help you determine which items are your best sellers and which are underperforming. Not only does this give you a clearer picture of your major profit streams, but also helps you make strategic product decisions for future growth.

SKU proliferation usually happens when companies create variations of products to match unique customer preferences. The problem is that more SKUs can mean increased cost of producing and maintaining inventory. The demand for a particular SKU may not be high enough to swiftly move inventory. Moreover, in some industries new variants could cannibalize demand for existing products, meaning a company would add an extra layer of complexity to their supply chain for virtually the same sales volumes.

SKU Rationalization is a decision-making process that determines if a product should be continued. There are various techniques for reducing or rationalizing SKUs, but one of the most popular is performing a GMROI Analysis (Gross Margin Return on Investment) where a ratio is obtained from dividing the gross margin by the average cost of inventory. If the ratio is above 1, the product is considered profitable. Products with a ration under 1 are deemed unprofitable and may be discontinued.

 

Summary

SKUs are a shorthand way to categorize every item of inventory you stock. It helps staff with quickly identifying and efficiently picking products. SKUs also make it much easier to keep track of inventory at each DC location. Access to real-time inventory information, through a WMS, allows managers to make smarter stocking decisions.

Finally, analysing attribute level data helps clarify the impact of each SKU on sales, helping managers with deciding which variations to add or eliminate from distribution.

iWMS Australasia utilizes HighJump technology, a solution that can be scaled and tailored to meet any business needs. The core software architecture can be easily adapted in a fraction of the time of conventional systems, and at a fraction of the cost! And because all changes are external to the core software, upgrades and support are not compromised. This guarantees low total cost of system ownership.

Contact us today to discuss your business requirements.