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Guide to SKU Inventory Management

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What is a SKU?

SKU is short for Stock Keeping Unit.

It’s made up of a series of numbers and alphabets that represents a unique product.

The item number isn’t the same as the SKU. In an SKU the different components of a product find their unique signatures and all of them combine to form the SKU.

A big advantage that SKU offers is it minimizes the risk of error by adding a unique identification be it a manufacturer of products or retailer. Another advantage that it brings to the table is SKU numbers are specific to variants be it something small like a different color. This ensures that you have a good grasp of your inventory management and every single thing’s accounted for.


Another technique that’s commonly used to categorize products is with the use of barcodes and serial numbers which serve purposes of accounting and stacking but don’t offer several advantages solely unique to SKUs. Let’s see what those are and how SKUs streamline picking and stacking products.

Let’s see how they work.

How do SKUs work?

For instance, let’s say you retail dog collars. Now you have manufactured two of them that are same in every aspect except color— one being grey and the other one red.

So let’s assign SKU1 for product A and SKU2 for product B.

Imagine introducing one more variance. Dog collars for small-sized dogs which are comparatively smaller than the original one.

So there’s the original product SKU1 and the shorter one SKU3. Now the shorter one also comes in color variations— the original in grey and the variant in red. Let’s call the red one SKU4.

In total there are 4 product variations and 4 SKUs.

Here’s an example.


What are SKUs beneficial for?

They’re worth countless hours saved in frustration.

With these unique ID numbers you’re able to tag your products.

That helps in determining which products are quickly moving off shelves. That way you can crank up on production for fast-moving products or order higher numbers depending on sales volume.

Thus, SKUs present a granulized picture of your online store.

This additionally help crunch revenue numbers by making it easy to see which item sells how many numbers.

SKUs help sell more products

Stores across the US have begun reducing the unique SKUS they carry for similar products from different manufacturers.

Essentially they’re limiting choice.

That has a positive impact on sales. Since too much choice often kills conversions.

As counter-intuitive as it may seem, limiting the number of choice clears customers’ heads and helps them think straight.

A few scientific studies have highlighted the fact that less is more.

I’ll explain with examples.

Walmart took a bold step in reducing average number of store displays by 15%. Grocery chain Tesco too followed in the same footsteps culling down inventory by 30%. Glidden a renowned paint maker tamed its color palette from 1000 to 282. When Proctor & Gamble reduced the number of shampoos by 50% they witnessed increased sales of 10%.

Back in 2014, average supermarket carried over 40000 products a 500% increase compared to supermarkets in the year 1975.

Clearly, overstocking hasn’t worked. SKUs help determine the movers and shakers helping make tough decisions easy.

Customers might be able to find products sooner with SKUs

Customers might copy the SKU and run a Google search to determine the cheapest product on sale.

Millennials today are a lot smarter and do much comparison shopping. Copy pasting SKUs is a crowd-favorite when it comes to pushing the buy button.

You don’t have any SKU—you miss valuable real estate. A chance to be in-front of purchase happy customers who are at the verge of swiping their credit cards.


You don’t want to be on the list of have-beens.

Here’s an example where I search the SKU number shared above. Look at the results I get.


Reduce shrinkage with SKUs

Another reason to use SKUs is to help identify shrinkage.

A retail store orders and stacks thousands of products from different manufacturers. As such it’s essential to implement a strategy that takes into account the actual number of products coming in.

A few might be lost in transport and some others due to theft.

SKU numbers make it easy to identify the number of variants and units ordered for each. So if SKU1 has 10000 units and you get only 9500 you should be able to attribute that to theft and report them as missing.

Concluding thoughts

The obvious tradeoff seems that you need to offer an unlimited number of SKUs. This can be detrimental to long-term success and ups the ante on several costs include warehousing and stocking.

But it isn’t necessary to do that.

You can very well offer a limited range of products based on sales data. The ultimate goal of providing variations isn’t to provide it for its sake but help get granular data.

Customers don’t need a water purifier in 20 different color variations.

The end goal is purified water which can be achieved with any color.

SKUs lend more than one benefit— they present the bigger picture, help customers do comparison shopping, give you more search engine real estate online and help sell more. What’s not to like about them?

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