Stock keeping unit (SKU) meaning and how to use

Stock keeping unit (SKU) is a unique code that you use to identify every inventory item in your stockroom. Learn what is a SKU and how can it help you?

A woman updating her stock keeping numbers on her handheld device.
Published: 31.03.2021

SKU (stock keeping unit) is a unique code that you can use to identify every inventory item in your stockroom.

Using SKU codes is an essential element of inventory management that helps you easily track your inventory items and their variants (e.g., color, size) in:

  • Lists
  • Invoices
  • Manufacturing
  • Purchase orders
  • It’s important to have SKUs because if your warehouse is filled with hundreds of products, having a clear understanding of stock levels without SKUs is impossible.
  • In this article, we’re going to look into SKUs, the benefits of using SKUs, and how to make an SKU in your manufacturing business.
Simplified illustration of a barcode and an SKU number.

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What is SKU?

SKUs need to be set up in a way so that anyone in your manufacturing business can understand them.

Take a look at this:

TBL-M-WH

Do you know what it means?

How about this:

COA-14-BK

No?

Well, there is nothing to worry about because there’s no way you can know what this jumble of numbers and letters means… Yet.

This seemingly random assortment of characters are examples of SKU codes that can be read either by machines or yourself.

SKU codes should help you identify the exact product variant you are looking for. Therefore, you should incorporate information such as color, type, size, and other similar attributes into the SKU.

This saves you time decoding the SKU during everyday operations.

For example, if your product list includes a sleeveless shirt for women, then the following would be a good SKU example code:

Simplified illustration highlighting the workflow of creating an SKU.

This is a relatively simplistic code, you can make them more complex if needs be. For example, if you have products that move between locations, then maybe having area codes of the original location is necessary.

Reading these codes might seem like a lot of effort at the beginning. But the reality is that they will be used daily, so eventually, reading them will become second nature.

When setting up your SKUs, remember that this is ultimately to make communication easier and help grow your business, taking into account what is important for your business so that you can tailor the SKUs into what you want.

Looking for a way to generate and manage stock keeping units for your inventory management? Try the free online SKU generator from Katana.

What are SKUs used for?

SKUs are an important tool, not just for manufacturers but for retailers too. But, for manufacturers, it’s more important to have them set up since you’ll need to track:

So, what exactly are SKUs used for?

1. Inventory management

SKUs help you categorize, organize, and track your inventory levels, regardless of if you’re doing your inventory management in Excel or with automated MRP software.

Without SKUs, all of your inventory management efforts will be guesswork.

Once you have your SKUs set up in your business, you can determine the best levels of stock to keep for all your items from gathering information such as sales history, which will save you time and money down the line.

2. Product recommendations

Using and defining SKUs will help your e-commerce store page make better suggestions for customers when they’re shopping because it’ll be able to determine the similarity between products.

So, let’s say you have a customer who is on your website looking at clothes made with 100% cotton. The unique SKUs on products and variants mean your store will be able to make suggestions to the customer by matching similarities within the SKU.

3. Analysis

We briefly touched on this, but SKUs on your products are going to help you collect invaluable data on your products, allowing you to analyze:

  • It’s popularity
  • Seasonal demand
  • Cyclic sale trends for different customer segments

This information will allow you to eliminate dead stock, prioritize products, and better plan production cycles.

Ultimately, how you use SKUs all depends on your business’s specific needs. However, you’ll need to use them though, as they’re a necessity for inventory management and analysis in your warehouse, manufacturing, and storefronts.

SKUs will help you establish a common language for you and your staff, so there can be no confusion over your item’s variants.

SKU inventory tracking

What is an SKU? To recap, the meaning of an SKU is stock keeping unit, and you’ve probably already seen a pattern as an SKU is essential for overhauling your inventory management.

However, to take them to the next level, you can track your SKUs so that you can optimize your inventory and maximize profits.

The best way to make use of SKUs is to set reorder points for each of your products. This means that you will only order stock when you need it to avoid stock-outs but also save money and resources.

Your stock levels don’t have to take any more space than they need to while simultaneously always being on hand to manufacture without delay.

There will have to be a bit of time spent on setting this up. But once you do, the amount of time you save in the long run is not even comparable. And once it’s spotless, you can see everything that’s happening with full visibility.

In the same way, you can use visibility with your SKU to prioritize the product variants that you can see are doing well.

With an SKU inventory, each of the variants can be tracked and compared to others.

So, upon inspection, you might see those blue t-shirts seem to be the most ordered across the board. That gives the incentive and understanding to drive sales however you see fit.

Maybe you want to market your other products more.

Or you decide you want to take advantage of this sudden love of the color and do some blue-based promotions.

The potential benefits are clear once you have set up your SKUs, and they won’t all be clear until then.

Material requirements planning software

Katana material requirements planning software helps modern manufacturers maintain control of raw materials and final products in real time. Keep track of materials and product stock to avoid stock-outs.
Skateboard manufacturer enjoying a coffee break at the workstation, updating their ERP manufacturing software.

SKU e-commerce usage

If you have an online store where you sell your products, then it can be really useful to use the same SKU system on the store as with your inventory management.

Especially if you use inventory management software to match the two, rather than using spreadsheets because this means your inventory is always up to date on both systems, and you can deliver to your customers without delay.

A great online store platform to use is Shopify which caters to all kinds of businesses, especially growing manufacturers and workshops.

Implementing a Shopify SKU system means that you can optimize your Shopify inventory by using the same SKUs as you do with your inventory management software.

So, you can compare all your reports on either system without any hassle.

If the sales for TSD-S-BL are skyrocketing on your Shopify store, then you can seamlessly switch to your inventory management software…

You see the matching SKUs and life suddenly makes sense!

Now you can set the inventory levels at what you need them to be to match the sudden rise of demand, meaning no more customers waiting desperately waiting by the door for their delivery.

That’s just one example, but integrating your Shopify store with your inventory is only going to give you more control. One of those lucky few situations in life where there’s nothing to lose.

Are you not using Shopify but another e-commerce such as WooCommerce for your online business? You can also adopt a stock management system to use with WooCommerce.

PRO TIP: If you are a manufacturing business selling on Shopify, you’re probably struggling with manufacturing, inventory management, purchasing, and meeting deliveries. Try the best Shopify order management system for scaling manufacturers, and get the freedom you deserve.

Alongside solving your Shopify inventory tracking, you can also involve customers with your system to make their lives easier. It might seem counterproductive to list your SKUs on your store, but there is a reason that Shopify has that feature.

Having the Shopify SKU code at hand, you can find out very quickly what the options are for the customer.

That’s the beautiful thing about having these codes. They just work as shorthand for anyone that has anything to do with your business.

Everyone can get an understanding of all the options and variants that are available to them efficiently.

It’s time saved for you and great customer service for them.

If you’re wondering how to make an SKU for your Shopify store, then look no further.

You can check out our Shopify SKU generator to help you get the ball rolling.

Screenshot of Katana highlighting SKUs saved with the software.

Inventory management software to take control of stock

You can use inefficient Excel spreadsheets to handle your inventory and SKUs, but

this will inevitably lead to issues as spreadsheets are prone to errors.

That’s why it’s important to set up your SKUs on cloud manufacturing software which will allow you to:

  • Get real-time insights on inventory to avoid stock-outs
  • Setup reorder points to highlight inventory running low
  • Get automated updates on inventory increasing and decreasing based on manufacturing orders and sales orders

And that’s it. Everything you need to know about SKU implementation and management. We hope that you found this article useful, and until next time, happy manufacturing.

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