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Inventory management is an integral part of running an eCommerce business, and as your business grows, it becomes more complicated. Once the volume of your products grows, inventory management can become quite messy. To avoid trouble, make sure to introduce a good stock keeping unit (SKU) management system.
This paper will tell you what stock keeping unit is, why you should have it, and how your organisation will benefit from well-chosen SKU.
What is an SKU?
An acronym SKU stands for stock keeping unit. It’s an alphanumeric code compounded of letters and numbers, and it serves to uniquely identify and keep track of every single piece of your inventory.
An SKU indicates an item and its characteristics such as brand, colour, size, etc. It helps to categorise stocks by features and differentiate them from related products. Therefore, stock keeping unit system facilitates inventory management and measuring sales.
Inventory SKU management is very common across eCommerce businesses and retailers. It helps identify, track, and manage inventory. Additionally, SKU numbers are specific to every business and usually follow a standardized, logical formula. Thus, it is easy to use and scale for item catalogues.
What is SKU inventory management?
SKU inventory management is something that helps eCommerce businesses and retailers stay organized. The subset of inventory management processes improves identification, tracking and management of the items.
Every item has an alphanumeric code assigned. Therefore you can access all the information about the product and pull it up very quickly to see, for example, how many units are in stock.
A seemingly complicated sequence of letters and numbers (like PUM-TS-BL-WS) is, in fact, more helpful than Blue T-shirt. Without SKU designations, you could get confused with similar products and mismanage your stock.
SKU is essential for every company that sells more than one product. Even though inventory management might have seemed like an easy process at the beginning, you will quickly discover that it becomes more complicated as your business grows. Your product line evolves, you sell more, and SKU becomes a crucial element of successful management.
SKU management best practices
Let’s see some of the best practices in SKU management that can help you once you decide to introduce or improve an SKU in your organization.
Use your own SKU numbers. That way, your system will be much easier to work with. You will speed up the process of data entry and inventory management; thus, your suppliers will be able to track more efficiently. Remember not to use too much detail, as more extended numbers will complicate things. Instead, use shorter versions, including only first letters, for example, XS for the extra small.
Standardise your SKU with a simple framework. Naming conventions will help you avoid confusion while managing your SKU. The simplest framework for an SKU is the ‘manufacturer-colour-size’ format. We recommend using this one or another, similar one. The important thing is to keep it short and clear.
Set specific reorder points for your SKU. Don’t order the same amount of every item for SKU at the same time. Some products sell faster than others, so you could end up having too much or too little of some inventory. Instead, determine points for each SKU with reorder quantity formula. To estimate it multiply the average daily units sold by the average lead time.
Gropu SKUs by similarities. If you place items that look alike near each other, it will be easier for your customers to find the product they want, for example, when they are looking for a different colour. You can manage your store settings to display different options for the same item. Therefore, it will be easier to analyse which products are in high demand.
Don’t confuse letters, numbers, and spaces. Do everything to avoid confusion. If you decide that a letter S stands for small, stick to that rule with all your products if possible. Also, lower “l” and upper “I” look the same in many fonts. Make sure every letter is capitalized to avoid mistakes. Finally, do not use special characters such as “%” because your goal is to create as clear and legible SKU as possible.
Calculate the SKU ratio. If you want to know what impact every SKU has on sales, that’s a must. SKU ratio means the number of SKUs in a gross profit range divided by the number of all SKUs you have and then multiplied by 100 percent. Once you calculate it, it is a good practice to compare the SKU ratio to the sales ratio.
Remove unpopular SKUs. Even though extending your product line means the business grows, there is no reason to keep onto items that no longer bring you profit. Optimize inventory by determining slow-moving SKUs to cut unnecessary costs. Remember, it is not always about the amount, but the quality.
What are the benefits of SKU?
SKU systems are a must to drive inventory management successfully. What are the benefits of such a solution? Here are some of the most important advantages of SKU.
Improved inventory tracking
If you want your inventory management to be accurate, SKUs are, without a doubt, something you should implement in your organization. SKU will help you see the important data about the current state of your inventory and stock levels whenever you want. That way, you will know exactly when there is time to restock.
Restocking in an eCommerce business is crucial to keep up with customers trends and have the right products in your inventory. Reliable stock level tracking will allow you to provide buyers with the best experience.
Optimized selling process
With adequate SKUs, you can streamline the selling process and improve the customer experience. When new orders come in, you can display them on an order management system and, thanks to SKUs, display and locate products quickly with no risk of misplacing inventory or making mistakes.
Better insight on customers behavior
With a proper SKU, you will run a much more accurate analysis of your sales and inventory. Based on the results, you can quickly estimate which products are in the highest demand and which are not. Thus, you can easily improve your strategy without much effort by monitoring market trends from the insight. You will always know what items to procure to take the most advantage of it possible and avoid mistakes.
Better warehouse accuracy
By using SKU codes, you can make better use of warehouse space and optimize expenses. The more insight you have with your inventory with SKUs, the more profit you can achieve.
As most warehouse operations are often performed manually, there is a higher probability of human error. With a transparent SKU system, you will minimize such risks when complementing products.
Thanks to SKUs, you will be able to use an automated warehouse management reporting system, and this will provide you with reliable reports to inform you of inaccuracies in your warehouse operations, such as how often items are not found in the expected places, mislabeled, damaged, or out of stock. That way, you will see clearly the complete picture of warehouse operations and identify issues.
Enhanced logistics
If you have an SKU system and additionally use third-party logistics services, you will greatly facilitate the quick identification and location of your products and thus avoid misunderstandings.
In addition, with the help of SKUs, you will improve sales analysis and buyer profiles, so you will easily find out where most of them are located. Based on that analysis, you can place products in demand in warehouses that are closer to the customers. You can be sure that you will be positively received then.
Conclusion
Implementing an SKU system in eCommerce can boost your business scores. However, remember to choose only those SKUs that respond to your organization’s needs and plan a robust strategy before introducing them. With appropriate SKU management, you can increase the efficiency of your business on many levels. SKU brings benefits not only to inventory, but also finances, productivity, customer satisfaction, reporting accuracy, and even marketing. If you want to make the most of your SKU system, do not hesitate to contact us and let us estimate a customized project for you.
March 17, 2022
