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What is an SKU? How to build your SKU system?

Whether you are new to retail or you have been managing inventories and product catalogs for a long time, you will already be familiar with this code and its strange name: SKU.

A person responsible for running an online store should never assume the establishment is too new or does not carry enough inventory to justify using SKUs. A SKU reduces challenges for merchants and vendors alike.

In this post, I will present the key uses of SKU and its advantages to businesses. Now, stay tuned with my post and find something useful for your inventory tracking management.

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Table of content

What is SKU?

SKU (Stock Keeping Unit) is a unique string of letters and numbers assigned to help retailers identify items on lists, invoices, order forms, and within your POS as well as the inventory management software. Each product’s specific traits, including manufacturer, brand, price, style color, and size, are visible to be seen from SKU.

SKU number examples

SKU number examples
SKU number examples

All companies or vendors generate their own internal SKU code, precisely pinpoint and track their products at any given point in time.

On any product, we can see some other identification numbers, which are possibly confused with SKU. However, each number serves one purpose. Please have a look at a few different IDs that go with products. SKUs are not:

UPC: A Universal Product Code is a universal identifier made of 12 digits, representing for product and manufacture information. This is the barcode that you scan in warehouses, at the point-of-sale, etc.

MPN: MPN stands for The Manufacturer Product Number, which is the code issued by the manufacturer to the individual products. Including MPN in your SKU would help you expose your supply chain quickly.

Barcode: The barcode is the combination of UPC and EAN.

EAN: The International Article Number, also known as European Article Number is a global identifier, comprising of 13 digits. EAN helps to identify a specific retail product type, in a particular configuration of packaging, from particular manufacture. It’s often combined with the UPC because both exist as a barcode and alphanumerically.

What is the use of SKU

Functioning as the manufacture’s secret language, SKU is a vital piece of information for each product and ensures straightforward and correct identification throughout the production chain, inventory tracking, and sales.

Now, we are going to break down the significant benefits of SKU to any business’s operation.

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Inventory tracking

If thousands of items in the warehouse arrive at stores, it becomes almost impossible to track inventory smoothly without making errors. Because SKUs include an alphanumeric system that is mainly designed for internal management, they support accurate stock-taking and minimize many of the difficulties associated with warehouse logistics.

SKUs support accurate stock-taking
SKUs support accurate stock-taking

By conducting stock counts with SKU’s support, store owners can get accurate pictures of the product’s status and then determine what’s available to sell, which consequently contributes to stockout prevention. Furthermore, when looking at SKUs status, the store owner can adjust and manage products in high demand or according to demand flexibility.

Simplify stocktakes and shrinkage

To make sure the actual stock level at the warehouse matches with the ones recorded in the inventory management system, stocktakes are supposed to be done at any intervals regularly. When every of your product variation coded with a unique SKU, the organization and identification of products using SKUs make stock level reconciling simple and straightforward.

Besides stock level identification, shrinkage is one of the crucial aspects that need identifying. The shrinkage happens when items are damaged or missing along the supply chain, which is mostly due to theft. By using SKU, store admin can ensure the transparency of stock movements and recognize where and how stock goes missing, which significantly reduces the chance for theft.

Sales forecasting and catalog reinforcement

Sales forecasting and catalog reinforcement
Sales forecasting and catalog reinforcement

By using a company-specific barcode for each item, you can analyze the volume and progression of demand and sales over time more effectively before making any sales and marketing decisions.

The cost and revenues relevant to each SKU number, including size, colors, materials, etc., will help you quickly identify which products are your best seller or underperforming. Based on the SKU trends, you can get a whole picture of your profit stream and then make both long term and short term sales strategy to develop your business sustainably.

Customer service improvement

Due to SKU, customer service staff or sales assistant can locate each product and query quickly. Within a few seconds, they can find a product, repeat a previous order, suggest similar products, or compare product features.

For example, looking at SKU, the sales assistant can figure out the product customer is looking for, view its current stock level, and offer other alternatives if the customer’ wanted product is out of stock.

SKUs improve customer service
SKUs improve customer service

For brick and mortar stores, this kind of SKU benefit is just as important because the sales assistants can immediately answer any question about stock without having to access the warehouse or trawl the shelves by hand. Also, in terms of design and layout, it helps to reduce the exhibited inventory to just one item per category.

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How to design a correct SKU architecture?

To create an accurate SKU system for your business, we recommend you follow some best practices

Use SKU generator

While it is possibly easy for small businesses to create SKU manually, for enterprise brands with an increasingly expanding catalog, manual creation does not work for a scalable process. However, if you are about to use a SKU software or a third party free SKU generator, the entire process will be simplified.

You can think about Zoho, Mrpeasy, Gorgias, etc., when it comes to SKU generation.

Generate a coding system

The coding system is considered an integral part of the SKU generation. Despite providing unique SKUs, randomly generated numbers can make SKU management difficult when you need to analyze data or add SKUs to variation within a specific product set.

Establishing a coding system with abbreviations is highly recommended for the convenience of management.

For example, you can create codes for color.

SKUs for color
SKUs for color

Or product sizes and more

SKUs for size
SKUs for size

Once you establish a coding system, make sure that your SKUs are easy to understand regardless of who looks at them, especially for your team, not just those who are responsible for handling and shipping your products.

Besides, it is good to avoid overloading your SKUs. Try to keep each code alphanumerics if possible.

Have a standard format

No matter how you establish your SKUs, by a generator or manual process, you should apply a standard format. Once you have a standard format, always create SKUs in a similar form. This makes it easy for your staff to know what each code represents when matching a SKU to the product for picking and shipping.

The best approach is beginning with the most essential product information first and ending with product variants. Options with more variations should be placed at the end, while the ones with only a few options (like gender) should go at the beginning, but typically after the product category and product type.

Here is a format that you can use for your SKU system

Brand > Product Category > Product Type > Gender > Material > Size > Color

If case you have to include a lot of details in your SKU formats, try to generate SKU code no longer than three characters or use numbers instead of multiple characters.

Do not use the same letters or numbers

Because SKUs are usually read by your team at a glance, avoid using similar symbols, which can be misread.

For instance, it is possible to mistake the number “0” and the letter “O” or the number “1” and a capital “I”.

Avoid starting SKUs with number 0

As we mentioned above, you should not use the number 0 to avoid confusion with the letter “O”. However, if it is a requirement, do not place it at the beginning of your SKUs. That is because Some software may interpret the number 0 as nothing and could omit the first digit.

Ensure your SKUs are unique and non-duplicated

To ensure proper inventory checking and provide customers with precise information at any time, you should avoid duplicating SKUs within your own catalog. Even if a product has been removed from the catalog, try not to re-use old SKUs as this may cause identification problems or shipping errors.

Do not use space

Although each code in your a SKU should be separated to be read easily, never break up your SKU using spaces because of the following reasons Firstly, it possibly results in SKU reading mistakes as a person is not sure whether multiple sets of numbers apply to the same string or SKU. Secondly, some software may understand space as a hard stop can ignore the data coming after space.

To solve the space issue, you apply a dash between each code in your own SKU, especially when you create and enter SKUs manually.

Related posts:


We can see clearly that SKU is an integral part of your business operation. The proper organization for SKU will definitely benefit your sales and give you more insight into the business operations before you make any sales decisions. By following our suggested practices, you can build your own SKU code and avoid some common mistakes that usually happens. Manual SKU generation is applicable for small businesses; however, for bigger firms, we still recommend you to use SKU generators for the quick and correct results.

We hope you have enough information and knowledge to establish our own SKU system. Thank you for your reading time!

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