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What does ‘SKU’ mean and how can this concept help my business?

What are stock keeping units? In our article, we define what an SKU number actually is and why you need a SKU in the logistics sector.

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What is a SKU?

SKU is the abbreviation for ‘stock-keeping unit’. Let’s suppose you sell t-shirts in five colors, each in three sizes. Your t-shirts amount to 15 SKUs.

People often wonder how to say ‘SKU’. Well, you have options! You can say it as a series of letters – “S – K – U” or you can say it as a word: “skew”.

And what is not a SKU?! A SKU can easily be mistaken for one of these other identifiers below, but there are some important differences:

Why are SKU codes so important in eCommerce logistics?

SKUs in logistics are one of the fundamental building blocks of successful inventory management. They are essential. Without them a growing company simply won’t be able to operate. This is one of the reasons why we at the DHL Fulfillment Network collect a new customer’s SKU codes right at the onboarding stage.

Let’s look more closely at why they are vital:

Using SKU codes helps enable your warehouse or fulfillment center to manage your operations:

  • Inbound: they help identify products
    - If a SKU code is already on the system, then this is an existing product line
    - If it’s a new SKU code, then it’s a new product
  • Stock-keeping:
    - All stock of a single SKU is kept together in one warehouse location, maximizing the space available.
    - Stock that looks very similar but is of different SKUs should be stored apart from each other in the warehouse: i.e. red t-shirts in small, medium and large sizes will be kept in three locations away from each other, to reduce picking errors.
  • Outbound:
    - Orders state the SKU codes that are to be picked, so that the picker is clear. We will always scan the SKU code for each item to ensure we always pick the right item for an order. 

What happens if the wrong SKU code is used?

  • Inbound:
    - Incorrectly stored stock can lead to picking errors, resulting in unhappy customers receiving the wrong products – with knock-on costs of returns.
  • Outbound:
    - Incorrect stock will be picked.
    - When a barcode is scanned, if it does not match the intended SKU code, a warning will be given. Although this will identify a problem, time will be needed to rectify it, slowing down your orders.

SKUs help businesses track inventory and make decisions on purchasing:

Your SKUs are the first place to look when you want to analyze your inventory. Think of them as the ‘base level’ of your stock. You will know exactly how many medium green t-shirts you have sold, have in stock, and need to order. You will know that yellow t-shirts have sold poorly all year, and that sales of red t-shirts boomed coming up to Christmas.

On the other hand, if you merely look at stock at the level of a product group or ‘family’, you might see that you have plenty of green t-shirts in stock, but not know that you have overstocks in a size small, and have sold out of a size large.

In failing to drill down to SKU level, you will be unable to make informed decisions on inventory and purchasing, as your analysis will not provide you with the full picture. You won’t understand the nuances of your sales and you will miss opportunities to grow.

smiling woman in a warehouse

How many SKUs should my business have?

There is no single correct answer to this question. A large multinational fashion retailer will have tens of thousands of SKUs, whereas a startup or scaleup making a more niche product may only have ten to begin with.

However, there is one truth that applies across the board: you should only have as many SKUs as are necessary for your growth – and for growth you can handle.

The more product lines and SKUs you have, the more risks you carry:

  • Your complexity grows: this will affect your inventory tracking, your forecasting and your purchasing.
  • You need ‘safety stock’ for each SKU to cope with unexpected orders. The more your stock, the higher your costs.
  • Each time a SKU is out of stock can mean disappointed customers who take their business elsewhere.
  • It’s ideal to have stock stored in locations close to your customer bases. The more SKUs you have, the harder it is to set up and manage multiple stock locations.

How to create Stock Keeping Unit (SKU) codes

One key point here is that your company can set up your own product SKU codes. You don’t need to have them created by, vetted by or registered with any external body. You can simply use a spreadsheet to set up and maintain SKU codes, however software is available to help you generate them quickly and effectively, if you wish.

These are some key factors to consider when establishing SKU codes:

  1. How can I categorize my products by their attributes? Think about colors, sizes, product types, materials etc.
  2. Devise a structure whereby the SKU code itself denotes key attributes of your products. Capture these in the first 2-3 characters, like TMC for ‘throat medicine for children’. Make it meaningful for your team.
  3. Finish your code with a unique and sequential number, like 001, 002 etc.
  4. Avoid starting with the number zero and using characters such as ‘&’ and ‘%’ as these can confuse users and software systems.
  5. Design your SKU codes with future expansion in mind.

You are likely to be using your SKU codes with partners: be that your suppliers, your webshop (e.g. Shopify, PrestaShop etc.) or your logistics provider. You may have set up a system of 8-digit numeric SKU codes, but will your partners’ systems require your code to be 12 digits in length, and include letters? The DHL Fulfillment Network can work with your existing SKU codes. Major webshops also offer this flexibility, however do explore with all third parties whether you will need to adapt them to fit with their requirements.

Man scans label

Let us help you make your SKUs work for you

At the DHL Fulfillment Network, we work with customer SKU codes all day every day. They are the building blocks of our whole inventory management machine.

Customers come to us for our network of professional fulfillment centers all around Europe, Asia and the Americas. This allows them to strategically locate stock close to their customer bases. They have the flexibility to move stock around and change stock levels in line with how their goods are selling.

And not only that, with our advanced inventory insights tool, each of our customers can view their inventory in detail on a dedicated dashboard, and then drill down further to analyze their stock levels and movements by warehouse location. They can even examine ‘what if’ scenarios for their inventory to avoid stock-outs.

All this thanks to – you guessed it – those SKU codes, that in so few characters can tell you so much.

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