SKU management

SKUs are an essential tool for managing a large list of unique products in retail. Find out how unique product SKUs can help simplify your entire order management process, from placement to inventory management and delivery.

SKUs, or stock-keeping units, are alphanumeric product codes used to identify items and search for stock of those items on invoices, lists, or order forms. Each product has its own unique SKU that is standardized across all distributors, whether it’s your online store or a brick-and-mortar retailer. The typical SKU will contain eight characters made up of a combination of letters and numbers.

These data-rich codes reflect the most pertinent product information, such as item make and type or category. SKUs can also contain location information relating to where a product was produced or is currently warehoused. Depending on the product, you can further refine this level of detail down to specific variants such as size or color.

SKU management or SKU inventory management is the collection of systems and processes a company uses to manage product inventory using SKUs. Through these processes and systems, you create, maintain, and optimize a SKU system to identify, track, and organize your product inventory effectively. Besides managing the inflow and outflow of inventory, management of SKUs also involves analyzing the carrying cost of each inventory item to ensure it meets your business’s financial objectives.

SKU management is a vital component of a company’s inventory management strategy. It affects many aspects of operation that can determine a company’s growth and success, from profit margins to customer satisfaction and retention.

As you begin receiving your products from manufacturers and distributing them directly to customers, you’ll need to efficiently manage incoming and outgoing orders and the inventory you have with which to do so. All of these products will have their own SKU, which helps you to most efficiently track your stock and ensure the orders are being packed accurately. The better the system you employ for managing SKUs, the more you can maximize your use of SKUs to streamline your ecommerce business processes and optimize your revenues and profits.

In other words, proper management of SKUs facilitates proper inventory and order management. It can help you:

• Reduce human error
• Avoid low inventory and backorders
• Customize reorder points
• Increase efficiency

In addition, by employing proper SKU inventory management, you can better analyze the carrying cost of every product you sell and determine whether it’s actually helping you to meet your goals; if it’s not, you can adjust your product strategy to better optimize your inventory, prevent high holding costs, and increase revenue and gross margins.

For instance, without proper SKU inventory management, you may end up filling your limited warehouse space with too much of one product and not enough of another. Not only is this an inefficient use of your capital, but it can also wreak potential havoc in your order management system and result in poor customer satisfaction rates.

Effective management of SKUs can also ensure you allow enough time to receive new incoming shipments of inventory to meet new orders based on the location information the SKU contains. Good product management can help save you loads of money, time, and stress.

Tracking SKUs properly can help you make crucial aspects of inventory management and order fulfillment faster, more straightforward, and less prone to errors. 

Implement a quality management system for SKUs from the time of your ecommerce business's launch, no matter how many unique products you’re selling. As your business grows, you’ll already have the systems in place for more seamlessly managing and sustaining that growth.

Here’s one possibility for effectively setting up your SKU inventory management system.

Determine the SKU ratio

1. Create a spreadsheet listing figures relevant to your gross profit range, including cost, sale price, and gross profit.
2. Determine gross profit range by creating a second spreadsheet breaking down those figures into appropriate ranges (e.g. $0-$10, $10.01-$19.99, and so on)
3. Identify the number of SKUs in each range, then divide that number by the total number of SKUs you have and multiply by 100. This is the SKU ratio.

Determine the sales ratio

1. On the gross profit range spreadsheet, enter the amount of sales units in each gross profit range.
2. Divide each of these numbers of units by the total number of sales.
3. Multiply each of these results by 100. This is the sales ratio.

Analyze your findings

1. Create a line graph plotting the SKU ratio against the sales ratio.
2. Identify the highest-performing gross profit range by studying the line graph to determine which sales ratio is highest above its SKU ratio.
3. Identify the lowest-performing gross profit range by studying the line graph to determine which sales ratio is lowest below its SKU ratio.

Armed with this critical information, you now know where to focus your attention most effectively by increasing inventory, varieties, or marketing efforts in some products and decreasing those elements in other products. You may decide to stop producing or carrying certain SKUs that aren’t profitable, or to increase production of your most popular products.

Implementing quality inventory management software capable of handling SKUs can help you tremendously to manage SKUs without demanding so much of your direct focus. This, in turn, can free you up to apply your precious time and unique set of skills and expertise to lead your company into optimal profitability and growth.