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Stock Keeping Unit (SKU) – Definition and Best Practices

Stock Keeping Unit (SKU) – Definition and Best Practices

Following stock keeping unit best practices is recommended when managing the SKUs in your inventory. Here is an overview of some of the best tips to follow.

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What is a Stock Keeping Unit (SKU)?

Stock Keeping Unit, known also as SKU, is a term used in inventory management. Simply put, SKU is a distinct type of item. It can be a product, a service, or a mix of both. It has to be unique, which means that two different SKUs have always a relevant attribute distinguishing one from the other.

The attribute can be any pertinent variable, such as color, size, weight, material, etc. The SKUs can be either tangible or intangible:

  • Tangible: A tangible SKU is a physical product that can be perceived by touch. When referring to tangible items you can go to your physical warehouse and take account of them. This is the case of, for example, cars, books, milk, or gases.
  • Intangible: An intangible SKU is a product that can only be perceived indirectly and there’s no option to count the inventory amount. This is the case with, for example, e-books, insurance, or downloadable software. Moreover, it’s important to remember that you can take account of the number of sales, but not the stock level.

Download a free SKU generator.

Following best practices is recommended when managing SKUs. Here are some tips to ensure optimal use of your inventories:

1. Classify your inventories according to importance

Categorize your Inventories following the Pareto Law. This law states that 20% of items represent 80% of the total inventory value and the remaining 80% represent 20% of the total value of the inventory. Remember always to classify your inventories in categories A, B, and C, either when referring to stock value or turnover. This classification will help to:

  • organize your warehouse layout
  • focus on the SKUs that need tighter or less control
  • proceed with adequate audit and control tracking systems

Read more about ABC Analysis in Inventory Management.

2. Introduce a consistent alphanumerical code system

Every SKU is unique and specific. Avoid using weird symbols, accents, or letters usable just in one language. Remember that the code system has to provide intrinsic attributes. It means that they should describe the SKU and say nothing about location, production shift, or any other extrinsic variable. If you manage different distribution centers or warehouses, make sure the SKU is the same. You may move your stocks or close a center one day, but the items will keep in any case the same attributes.

Consider always the particular case of your business. Color in your code system may be necessary for your shoe store but irrelevant for selling electrical relays.

Remember to consider always an SKU code system following the most important attributes. Reduce as much as possible the number of digits and keep the same amount of digits for all SKUs if possible. Use a pyramidal system using alphanumerical digits going from general to detail. It also helps users to recognize the SKUs immediately. For example, a sports distribution center may use the code SRB40UK-123 to define:

  • S: Sneakers
  • R: Running shoes
  • B: Blue color
  • 40UK: size 40 UK
  • 3 digits for the correlative numbers to identify variants.

Use brand or industry in the code system only when necessary, since they are not exclusive and one day the items can be replaced by others.

Prevent future growth and expansion in the code system. Leave letters and numbers for the future. Train your staff on how to use the system. Within a short period of time, the users will get familiarized with the system and know many SKU codes by heart.

3. Streamline your inventories

Use an adequate inventory reordering point system, depending on the type of SKU inventory strategy. These strategies can be

  • Lot for lot, when managing high-value SKUs. That follows a strict control or need to keep inventory levels as low as possible to cut the inventory cost.
  • Economic Order Quantity (EOQ), when managing SKU in larger volumes with constant demand.
  • Fixed Period, when managing low price SKUs with the least order release cost. Usually, they are produced in large batches with low-frequency production.

Consider also automating your SKU reorder points. Adopt an automatic Max-Min reordering point system. Use color signposts, or graphical level indicators on your shelves. They will allow you to know immediately when the stock is too large or too short. Consider carrying safety stocks to lower the risk of stock-out. Getting the right amount of stocks will help your organization avoid unexpected nightmares at the last minute!

Read more about Reorder Point and Reorder Point Formula.

4. Adopt a proper warehouse management system

A suitable environment favors the use of an adequate inventory system and vice versa. Both strengthen each other. That’s why you should optimize your inventory space, your cubic use, and accessibility. You can take advantage of all three dimensions and get access to a wide variety of SKUs without moving others.

Keep your warehouse clean, safe, and organized. Make corridors free of obstacles and adopt a layout respecting the items turnover. Implement lean manufacturing tools or introduce six-sigma programs to optimize your inventory levels. Dedicated or integrated Warehouse Management Software can be a big help as well. Remember always the 5S principles from Kaizen philosophy that always helps to keep your warehouse in good condition:

  • Sort: cut all the useless and/or obsolete materials from your warehouse. For example, sell, reuse, or remove those SKUs that you keep just in case for the future but consume space and resources.
  • Set in order: one SKU at one place and one location for one SKU. You will save valuable labor time when need to locate your items.
  • Shine: clean your shelves, your lockers, and any storing places. It’s not only about cleaning but also detecting anomalies and opportunities for improvement.
  • Standardize: adopt techniques that help you optimizing your SKU portfolio variability. Standardizing your SKUs will help to reduce your manufacturing costs and improve your service level. For example, introduce standard packing measures.
  • Sustain: adopt a continuous improvement culture. Reaching a good client or certifying your products should not stop you to adopt new practices that contribute to improving day by day.

Read more about Warehouse Organization: How to Set Up a Smooth-Running Warehouse.

5. Use an MRP system

The Inventory management system in an ERP or MRP may help not to leave the proper management for the sake of your good memory. An MRP system is the necessary pillar to sustain the aforementioned best practices. The MRP is necessary because:

  • It helps you to determine the shelf-life of your items and take actions, such as discounts, promotions or simply to sustain your FIFO/LIFO system.
  • The MRP system in place will help you to locate your SKUs easily in the right location and on the right shelf.
  • Follow up with the accuracy of your inventory levels.
  • All the members of your organization will be able to check the SKU’s availability.

You may also like: What Is Inventory Control? Definitions and Tips for SMEs

Karl H Lauri
Karl H Lauri

For more than 4 years, Karl has been working at MRPeasy with the main goal of getting useful information out to small manufacturers and distributors. He enjoys working with other industry specialists to add real-life insights into his articles, with a special focus on using the feedback from manufacturers implementing MRP software. Karl has also collaborated with respected publications in the manufacturing field, including IndustryWeek and FoodLogistics.

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