What is SKU Management? (And How To Master It)

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In this article:

Learn why SKU management is essential for your e-commerce business and how a total retail operations platform like Luminous can help.

What Is a SKU?

An SKU "Stock Keeping Unit" is an alphanumeric code used by retailers to track products from supplier to warehouse to customer. Most SKUs are eight characters long, made up of letters and numbers.

Even if you've been running your business for years or are just starting out, chances are you have a SKU system set up or know that you need one. You might comprehend the basics of SKUs, but not many people understand why they're imperative to inventory management and how exactly they work.

Are SKUs Universal?

Unlike a universal product code (UPC), which is applied to all products in the same category and cannot be changed, a SKU is unique to your business and can be assigned depending on the product's manufacturer, cost, price, or size. While two products might have the same UPC number, their SKUs will always differ.

All products have their own unique UPC, which you'll notice when purchasing from suppliers. If you're manufacturing your own products, then you too will need to label your merchandise with corresponding UPCs.

What Is SKU Management?

SKU management is key to keeping your inventory accurate. A software with a SKU management system helps identify, track and categorize sellable items using an alphanumerical code. This system helps retailers to keep track of their inventory as it store product information and attributes under a SKU (for example, how many units are left in stock).

Take jewelry as an example. It might not be practical to title an item with "385SAPHN," but it's a more efficient than using "Sapphire Necklace" to scan your inventory. If you sell replicas of the same product but with different gems, then you need a separate SKU for each model.

If your company offers a lot of products, SKU management is crucial. Although you may start small (packing orders out of your home garage), it's important to be able to manage stock-keeping units as your business grows, expands its catalog, and sells more items.

A warehouse management system (WMS) helps store data related to product SKUs, which allows employees to confidentially pick, pack, and ship new orders when working with a third-party such as Walmart or Amazon. WMS also tracks inventory across fulfillment centers and sales channels seamlessly.

Why Do Ecommerce Businesses Need SKU Management?

Reliable SKU management provides you with quick and comprehensive access to information on all inventory items. This data ensures more accurate order fulfillments and a streamlined process overall.

Increased Buyer Insights and Sales Analytics

SKU management is vital for any business that wants to optimize product replenishment. By collecting sales and inventory data for each SKU, you can make more informed decisions about what products to sell, how much demand there will be, and get rid of slow-moving items.

E-commerce retailers particularly benefit from a system that connects all of their tools because it allows for clear communication between applications. Having an integrated ecosystem means being able to compare data from different platforms and sales channels in order to spot new or missed chances for profit.

Improved Customer Experience

By understanding your inventory, you can more accurately predict customer demand and ensure that orders are delivered on time. This is especially important for complex orders or shipping arrangements.

SKUs don't just improve online customer experience, but in-store experiences as well. By ensuring that your product pricing and inventory are always accurate, customers will be more pleased with their browsing experience. And if they can't find what they're looking for, SKUs make it easier for employees to locate the item and complete the sale. By having a products SKU, pricing will be more accurate for customers during the check-out process. In addition, an inventory management system will also update and reflect any changes in inventory automatically.

Less Waste

Tracking product expiry dates and dead stock gives you a detailed understanding of what needs to be sold first. You can also see which items are running low and need to be replenished. By using a high performing SKU management system, you reduce the risk of overbuying or stocking out completely.

Increased Warehouse Productivity

If your staff can spend less time sorting or entering data, picking and packing orders, they can focus on more important tasks such as upselling or other sales strategies. Having a quality system in place to manage SKUs properly can save you, and your team an immense amount of time, energy, and money

Fewer Logistics Headaches

By implementing an inventory and order management software with SKU management features, you can keep your e-commerce business running smoothly by reducing the risk of overstock and stockouts. Updating product information, analyzing SKU performance, replenishing stock, fulfilling orders, offering customer service, and reducing human error throughout the supply chain can all be achieved with the right software.

What Are Best Practices for Ecommerce SKU Management?

While there are no defined rules for SKU creation, following some general tips will make them more streamlined and easier to use for inventory management systems, employees, and business partners.

Stick With a Standardized Naming Convention

In order to streamline a new SKU management system, establish a naming convention for your SKUs. A basic example of this would be the “manufacture-color-size” format.

Keep the number of alphanumeric digits constant (between 8-12). It may be tempting to make it more complicated, but a shorter code is simpler for your team and business partners.

Eliminate Letters That Look Like Spaces, Numbers, Accents, or Symbols

Be mindful of your choices when creating SKUs- some letters and numbers can look very similar, or even identical. For example, the letter "O" and the number "0". Also, avoid using uppercase "I", as it could be mistaken for the number "1".

Best practices dictate that you should avoid using special characters like "%" or "/." You're assigning SKUs to your inventory items to make them more manageable, so steer clear of symbols that could be confusing or difficult to read.

Group SKUs by Similarities

The earlier mentioned necklaces that come in a single style with various gems give you the liberty to advertise the product online with all its different colors. So, if a potential customer first sees the necklace made of ruby but would like sapphire better, you can show them different options right away. You can also increase your product's visibility by grouping similar SKUs together (e.g., gemstones).

Arrange SKU Characters by Importance

Before you give a product a SKU, think about how to describe it using easily understood terms (for example: Spring 2022, Necklace, Silver, Sapphire). By taking this extra step ,you can see which products are most identifying and important. For example: let's say you have a new necklace design every Spring; all you need to do is specify the collection followed by more minor details.

Calculate Reorder Points

When certain products sell at a quicker rate than others, you have to be mindful of restocking these items more frequently. This is where figuring out a product's reorder quantity comes in handy, and you can do this by multiplying the average daily units sold by the product's average lead time:

SKU optimal reorder quantity = average daily units sold x average lead time

Determine SKU Ratio

To calculate how each SKU impacts your e-commerce sales, you need to determine your SKU ratio. To do this, take the number of SKUs in a certain gross profit range and divide it by your total number of SKUs. You can get the percentage by multiplying this result by 100%.

To calculate SKU ratio using a spreadsheet, do the following:

  • Create four columns in a new spreadsheet (SKU, cost of inventory, sales price, gross profit)
  • Create the gross profit ranges (i.e., less than $5, $5-10, etc.)
  • Insert the SKUs that fall into each gross profit range
  • Multiply the number of SKUs in each of the four gross profit ranges by 100% to determine the SKU ratio

Or, you could use an all inclusive platform that manages it all for you.

Compare SKU Ratio and Sales Ratio

You will then want to compare this data to your sales ratio. Using the gross profit data from earlier to determine your SKU ratio, add a column with the number of sales units per gross profit range. Then, divide by total sales units and multiply times 100%. Doing so will allow you easily identify which are your lowest- and highest-selling SKUs.

Optimize Inventory by Simplifying and Removing Low-Selling SKUs

SKU management systems provide many advantages, one of the most important being the ability to discontinue products that don't make you money. It is essential for business survival to identify slow-moving SKUs and stop stocking them while giving more focus to items that are customer favorites. If you don't do this, you'll most likely end up wasting money on inventory storage costs and having products that are out of season, expired, or outdated.

How to Simplify SKU Management With an Ecommerce Automation Platform

SKU management is important, but it can be very tedious and time-consuming to do manually. Fortunately, you can utilize a highly effective automated SKU management system to save time and money while improving accuracy. Automating your SKU creation, organization, and analysis will reduce costs to ensure that you have the data necessary to operate your business as effectively as possible. There are many aspects of your business that a quality automation platform can offer.

Analyze Reports Related to SKU Performance

By analyzing your SKU data, you can learn essential details about your products and improve your profitability by implementing some changes. Most retailers never bother to study this level of data and only evaluate their sales and marketing efforts on a campaign basis. However, this provides little to no visibility and , as a result, decreases the likelihood of identifying problems with individual products.

If you organize your data by SKU, you'll be able to identify patterns that would take too long to find manually. By understanding your inventory's movement and journey, you can better match product performance with your desired outcomes. In turn, this allows for more strategic decisions that will help keep you afloat during difficult retail times.

Better product performance data can optimize your sales and marketing strategies, giving you a significant edge over the competition.

Manage Kits and Bundles Easily

Use kitting and bundling features to make more money by putting together multiple products from your catalog into a bundle. A SKU management system can help you put kits and bundles together, so that you're able to offer them to your customers. When you use SKUs that are easy to understand and classify, it's simpler to keep track of your inventory, which makes fulfilling product bundles a breeze.

Eliminate the Risk of Human Error in Inventory Control

By moving to an automated inventory management system, you can get rid of human error. If your team frequently makes mistakes when completing manual tasks, it'll end up costing your company money in the long run. Automated SKU management not only reduces the risk of error, but it also creates dependable outcomes. In addition, your team will be less stressed and have more energy to put into developing your business.

Identify, Organize, and Track Inventory With SKU Management Software

When used correctly, SKU numbers can help you keep track of your inventory and make it easier to organize. Because they are made up of various letters and numbers, SKU management systems can be easily customized to suit the needs of any business.

Optimizing SKU management will help you and your team better merchandise your sales floor or sales channel, efficiently serve customers and maximize sales. All of this leads to a more efficient and more profitable e-commerce business.

If you want your business to be successful as it grows, adopt these best practices and use an intuitive retail operations platform like Luminous. With Luminous, you can integrate and automate all of your retail operations quickly and easily. Schedule your free demo today, and let us light the way while you sit back and relax.

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