What is SKU and how does it optimize inventory at the point of sale?

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By definition, a Stock Keeping Unit (SKU) is a number assigned to a specific product sold at retail, which can be used to identify its price, features and manufacturer information.

But unlike UPC codes, SKUs are not universal. This means that each retailer must develop their own set of SKUs to organize inventory in their stores.

Because of this characteristic, and also because it can be read by anyone without the need for special equipment, the SKU is a powerful tool for tracking a business's inventory. When accessed through an accounting system, it provides a series of numbers that track unique information related to a product.

Classifications and categories
SKUs are typically divided into grades and categories. Many retailers use a series of closely spaced numbers in their SKUs to group products together, making them easier to analyze. For example, 25-10xxx might indicate gas ovens and 25-20xxx might indicate electric ovens.

The next number could be a color indicator. So 25-1001x could indicate overseas chinese in usa data white ovens and 25-1002x black ovens.

And the list can go on from there, depending on each retailer’s specific needs.

How to use SKUs?
Have you ever wondered how Amazon manages to choose the perfect item to display as a “suggestion” when you’re making a purchase? Well, the store does so using SKUs.

Amazon simply attaches a unique SKU with all of its identifying features to each of its products. So when you’re looking at a blender, the site will display other blenders as options for purchase. But you won’t see just any blender; you’ll see products that have similar features based on the SKU information.

Most systems allow your store to create its own SKU hierarchy or architecture. But before you create an elaborate system for your inventory, consider what your store really needs to know about each product.

For example, a shoe store might categorize items based on customer type (men, women, children), style (formal or casual), color, and material type. Larger stores might break down categories even further, based on seasons, new releases, or heel heights.

The more precise the organization of SKUs, the more detailed the reports generated will be to help the retailer manage inventory and sales. These same reports can also be shared with suppliers to negotiate better terms and identify the best and worst-selling items.

Inventory management
Have you ever been in a store and noticed when the salesperson checked the SKU to see if there were more items available? Inventory management is the central function of an SKU, as it makes life easier for stock managers. With it, there is no need to use machines to control the stock, just a person in charge can monitor it.

SKUs can also improve the customer's shopping experience by electronically identifying products in stock and reducing in-store service times.

Another great benefit of knowing your SKU is in digital advertising. With the competitive landscape of online retail and consumers constantly comparing prices with competitors, a unique SKU can help protect your margins. Many retailers will list their SKU instead of the serial number or manufacturer code in an online ad. This means shoppers can’t tell if the washing machine they’re looking at is the same one from a competitor. They can focus solely on the features of the product displayed.

Now that you know what SKU is, how about learning about another simple and effective tool for organizing products at the point of sale? See how to use the ABC curve in inventory management and further improve your store's results.