How to Create an Effective SKU System for Your Business

If you’re running a business with physical products, creating an organized system for managing inventory is crucial. Enter the SKU, also known as a stock-keeping unit. SKUs help businesses track products, manage stock levels, and optimize the entire ordering process. But what exactly is an SKU, and how do you create one that works for your business? 

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In this guide, we’ll walk you through everything you need to know about making an effective SKU for your inventory. From what an SKU should include to best practices for setting up your system, this guide will help you improve your inventory management. 

What is an SKU?

An SKU is a unique identifier that businesses create for their products. It’s used internally to track stock, organize inventory, and quickly locate items in a warehouse. Unlike UPCs, which are universal and assigned by external organizations like GS1, SKUs are custom-built by each business to meet its specific needs. 

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An SKU can contain information about the product, such as its size, color, and location within a warehouse. It’s a flexible tool that helps you manage your inventory more efficiently and makes sure you can easily differentiate similar products. 

What Should a SKU Include? 

Creating a SKU is all about making it simple and logical. SKUs are typically alphanumeric, meaning they use both letters and numbers. The key is to choose a format that makes sense for your business and reflects the most important details about your products. 

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Here are some common elements businesses include in their SKUs: 

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• Product Type: A short identifier for the category of the product (e.g., SHO for shoes or BTL for bottles). 
• Attributes: Details like color, size, or model. For example, a red shirt might have “RED” in the SKU, while a size medium could be “MD.”
• Location: Some businesses include the location of the product in the SKU, such as the specific warehouse or shelf where the item is stored. 
• Unique Identifier: A string of numbers or letters that make each SKU unique within your system. 

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Here’s an example of what a SKU might look like SHO-RED-MD-001

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In this case: 

• SHO refers to shoes 
• Red refers to the color 
• MD refers to the size
• 001 is the unique identifier for that specific product 

How to Create an Effective SKU System

Now that you know what a SKU is and what it should include, let’s go over how to create a system that works for your business. Here’s a step-by-step guide to making your SKUs both functional and easy to manage. 

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• Start with a Plan: Before you create your first SKU, take some time to plan out a structure that makes sense for your products. Think about the categories and attributes that matter most for your inventory. What details do you need to identify products quickly? Having a clear plan will help you avoid confusion as your product line grows. 
• Keep it Simple: While it’s tempting to include as much information as possible in your SKU, simplicity is key. The goal is to create a system that’s easy for you and your team to understand. Stick to short, logical codes for each element of the SKU. Avoid using overly long or complex complications that could lead to errors when entering or searching for products. 
• Be Consistent: Consistency is crucial when creating SKUs. Make sure every SKU follows the same format so that your system is easy to manage as you add more products. For example, if you decide that size comes after color in your SKU, stick to that format for every product. 
• Avoid Confusing Characters: Certain characters can create confusion or errors in your SKU system. For instance, using letters that look like numbers, such as “O” and “0” can lead to mistakes. Stick to clear, distinct characters to make your SKUs easier to read and enter. 
• Use Inventory Management Software: Manually creating and tracking SKUs can quickly become overwhelming as our inventory grows. That’s why many businesses use inventory management software that automatically generates SKUs and helps track stock levels. These systems can integrate your SKUs and help track stock levels. These systems can integrate your SKUs with other logistics processes, making your entire operation more efficient. 
• Test Your System: Once you’ve created a set of SKUs, it’s important to test them in practice. Make sure your team can easily understand and use the SKUs when managing inventory. If something isn’t working, don’t hesitate to tweak the system. The goal is to create a SKU system that simplifies, not complicates your process. 

Benefits of Having a Well-Organized SKU System 

An effective SKU system can bring a lot of benefits to your business. Here are just a few reasons why taking the time to create organized SKUs is worth the effort. 

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• Faster Inventory Management: SKUs make it easier to quickly locate products, whether in the warehouse or your inventory management software. This speeds up the restocking process, reduces errors, and helps keep operations running smoothly. 
• Improved Customer Service: When your SKU system is organized, you can fulfill customer orders faster and with more accuracy. This leads to quicker deliveries and fewer mistakes, which in turn improves customer satisfaction.
• Better Analytics: SKUs allow you to track which products are selling and which aren’t You can easily generate reports on sales trends, helping you make informed decisions about reordering and product management. 
• Scalability: As your business grows, an effective SKU system will grow with you. With a logical structure in place, you can easily add new products to your inventory without confusion or disruption. 

Best Practices for Maintaining Your SKU System 

Once your SKU system is in place, maintaining it is just as important as creating it. Here are a few best practices to keep your SKU system organized. 

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• Reviewed Regularly: As your product line expands, review your SKU system to make sure it still works for your growing inventory. 
• Train Your Team: Make sure all team members who handle inventory are trained in how your SKU system works. This will minimize errors and ensure consistency across the board. 
• Audit Your Inventory: Periodically audit your inventory to make sure that SKUs are being applied correctly and that all products are accounted for in your system.