This post has been written in collaboration with Marello
If you are a manufacturer, distributor, retailer, or warehouse manager, chances are, you’re probably familiar with a product code called SKU. However, many seasoned eCommerce businesses either:
- Don’t have a full grasp of their SKUs.
They are either not easy to understand, don’t have a logical naming convention, or their name is not properly arranged according to attribute.
- Utilize SKUs, but don’t use them to their full potential.
This means they are either not aligned across your product catalogs, sales channels, or not synced across all your systems.
Assigning SKUs to products presents a number of advantages to digital sellers, B2B eCommerce, or marketplace management businesses. Therefore, there are a number of best practices and strategies for managing SKUs, which we’ll describe in this post.
What Is an SKU: A Definition
SKU stands for a stock-keeping unit and is an alphanumeric code that eCommerce businesses or retailers assign to inventory. Each SKU number is unique to the product, helping businesses identify, track, and manage their inventory easily. SKU numbers are specific to every business and tend to follow a standardized, logical formula that’s easy to use and scale for their product catalogs.
In another example, let’s consider an automotive retailer that needs to set up SKUs to keep track of their inventory. They could select the letter A for automotive spray paints, B for automotive oils, and C for fuel additives. The next letter could denote the manufacturer, followed by the number for the container size, and so on.
What Is the Importance of SKUs?
An SKU, in and of itself, is just a string of letters and numbers. However, the way they are used and managed is extremely important.
SKUs play a crucial role in supply chains and business operations. Without SKUs, it is impossible to keep track of products, logistics, or fulfillment. Also, SKU logistics and effective tracking help to adapt to demand, avoid out-of-stock products, and lowers return rates.
SKUs also help automate repetitive tasks, improve productivity, and optimize product catalog management. Aside from helping you streamline operations, SKUs uncover what your customers want, where to cut costs, and what revenue-generating initiatives to focus on.
- inventory tracking
Since SKUs are the most precise identifiers of your product, they are ideal for understanding your true inventory situation. Regardless of the size or complexity of your catalogs, you can track products with various shapes, colors, sizes, or any other identifying attribute.
No matter the location of the product, tracking the SKU will give you a complete and real-time overview of what’s in stock. Knowing what is in stock, and where, will be the main source on which you base all inventory decisions.
- replenishing products
Having a unified and well-organized SKU structure makes it easy to keep a close watch on every product’s stock levels. It becomes easier to understand when new stock is needed or when old stock needs to move. In addition, warehouses can avoid dangerously low stock levels or carrying excess products that aren’t selling.
It can be time-consuming to get your inventory numbers right. It is like a balancing game. Having too much inventory means spending money on storage, or risking product expiry while having too little inventory means missing out on sales. Keeping track of SKUs helps you to avoid any inventory problems.
- product tracking
SKUs prevent your products from “falling through the cracks”. With every product classified according to your needs, it becomes easy to reference this data within existing systems. SKU data can be shared with your ERP, PIM eCommerce system, inventory software, catalog manager, or synced with third parties like suppliers, fulfillment, and 3PL centers.
- demand forecasting
Knowing the movement of your products via SKUs can help you visualize inventory flows and predict where they will be in the future. By analyzing the costs and revenues associated with every SKU number, you can understand how every product is performing and utilize the dynamic eCommerce pricing based on this data. This data is crucial for your sales and marketing department, which can offer ideas for discounts, promotions, loyalty programs, or content creation.
- customer experience
When you accurately assign SKUs to every product in your inventory, you eliminate the possibility of misplacing and mismanaging products. This makes it easy for you to build in reordering functions and workflows in your eCommerce system. You can use SKU codes to quickly locate the right product your customers are looking for, or report on its stock levels. Lastly, if the product happens to be out of stock, you’ll communicate that information quickly too, and offer the right alternative in its place.
And, in order to keep pace with customer expectations, businesses need systems that do not view SKUs in isolation but as part of a seamless customer journey. SKUs need to be visible in one place, no matter the location that they are in. Whether that’s a warehouse, a brick-and-mortar store, or even in transit to a customer.
Why Optimize SKU Architecture?
An optimized SKU structure and process eliminates headaches for growing businesses. While it may seem like a good idea, reusing old SKU numbers for new product versions can cause identification errors and confusion during fulfillment. Naturally, SKUs with fewer numbers and letters will be retrieved and synced faster between systems.
Long SKUs may not be a problem for small catalogs, but if you’re dealing with millions of items, this could affect performance. Lastly, keep in mind there’s no right and wrong way to name your SKUs, as every company’s inventory is different. As your inventory, customer profile, or business needs change, your SKU architecture should be reviewed, too.
Prepare for growth
With an SKU system in place, it becomes easier to find the exact product you’re looking for – no matter how many products you carry or how complicated your product lines may be. This is important for B2B sellers since some carry millions of complex configurable products with multiple variants, colors, and applications.
When you are looking for a product, make sure to include “scalability” to your checklist. Many systems do not allow for unlimited SKU growth. Systems such as OroCommerce and Marello do accommodate SKU logistics, as said, into millions of products.
Warehouses receive and send out products all the time. When thousands of new products come in, less-than-optimal SKUs can impact warehouse employee productivity, and impact operations. With more visibility into your inventory, it’s possible to build in additional processes to reordering your low-stocked items.
Losses due to theft, misplacement, inventory shrinkage, and high carrying costs can quickly creep up on any business. This is especially true when you manage tens of thousands of products. However, assigning each individual product a SKUs makes it easier to track where your products are and more difficult for things to go missing.
The more you know about your inventory, the more likely you’ll uncover costs sinks such as unnecessarily stocking slow-moving products and inefficient processes during product movements, such as during returns. This information can also help you automate routine tasks or rotate warehouse activities to improve employee productivity.
Business Intelligence reports can help you to get a deep insight into your SKU performance. Whether it’s about sales, inventory, returns, or refunds. Using and combining data will help you to get the most out of your SKUs and will boost productivity.
Reduce inventory costs
Holding inventory needlessly increases the costs of holding that inventory. Some businesses tie up significant capital into their stock. This is not a wise financial move, especially if that cash can be invested elsewhere. And, in industries where inventory can age quickly, products must be continuously monitored in order to avoid holding obsolete inventory that doesn’t match demand.
Predict and react to trends
Your SKUs are an excellent source of sales data. Cross-referencing sales data with customer behavior analytics can uncover your most popular products, how they are purchased, and what seasonal or cyclic sales trends affect purchases. Additionally, SKUs aren’t just tied to individual products, but their unique configurations, which is invaluable when crafting promotions, discounts, and allocating investments.
And, by tighly integrating your SKU with the supply chain, you can deliver a one-of-a-kind, cusomter-focued experience that will help you attract new customers and focus on keeping them.
Managing products with a suboptimal SKU structure is not only challenging for businesses. It also makes life more difficult for their shipping partners. If you’re using multiple fulfillment or 3PL services, utilizing well-defined SKUs helps them accurately identify your product and not confuse it with others within your company.
Avoid running out of stock
Every shopper’s worst nightmare is not being able to buy items due to out of stock situations. At the same time, carrying excess stock with low turnover and usage can diminish the profitability of a business. Assigning an SKU to every product helps identify low stocked situations before they reach critical levels.
Digital Operation Platforms (DOP) help you to keep track of your SKU’s and inventory levels accordingly. You can set up purchase levels for each SKU to create automatic notifications when your inventory is low. This way, you will never run out of stock, and you will never have to sell a “no” to your customer.
3 Ways to Better Manage SKUs
As mentioned before, different companies will have their own unique way of designing their inventory management processes, and that includes coming up with an SKU naming convention that matches their product catalogs. While all companies are different, there are some universal SKU architecture best practices for better inventory management.
Consider naming a product in your SKU as you would by describing it in words. Grocery retailers might begin their SKU number with a category or type (condiments, baby food, drinks), followed by the brand, and product line. This arrangement might be different for every business, but the idea is one and the same: to help you locate the right product immediately.
Easy to remember naming
Whatever character code you choose, keep them consistent, but also short in case you need to enter them manually. Start with a general identifier such as type, brand, or even your business office branch. Then, use more specific identifiers. It’s a good idea to add a versioning number at the end such as 001, 002 to product types you may add down the road, or existing products that could be discontinued.
Consider possible misspellings
Avoid numbers and letters that could come across as confusing, such as lowercase Ls and uppercase Is, using Os and zeros. Avoid using characters like slashes, mathematical symbols, bold or italic text. Choose a clear, easy to read font when displaying SKUs on your eCommerce site and packaging – something that eliminates any opportunity for error and misunderstanding.
Best practices: good and bad examples of of SKUs
|Alligator brand shirt red small||ALL-SH-R-S||Tshirt/AlligatorBrand/S|
|TruTool 45” garden shovel blue, 3rd edition||TTSB45-003||TRUETOOLSHOVELBLUE|
|Samsung 40” TV, manufactured 2019||SAMS19-TV40||2019.Samsung.40”|
Using ABC Analysis with SKUs
The ABC classification method follows the well known 80/20 rule or the Pareto distribution, where 80% of the value is generated by 20% of a group – and in our case, where 80% of sales revenue comes from 20% of stocked items. The ABC analysis is used by inventory management systems to identify the products that are in high demand.
The ABC analysis divides items into three categories: Category A, which are high demand items, typically consisting of fast-moving and sometimes low-value items that drive the largest percentage of your sales targets and revenue. Category B are items that see less demand and Category C items are even less important. Therefore, Category C stocks must be limited in order to avoid the high carrying costs of obsolete inventory.
Your SKU analysis should accomplish three main objectives:
- Identify which SKUs are fast-moving (Category A), slow-moving (Category B), or move very little (Category C)?
- What resources are used by each category, and how does this impact day-to-day operations?
- How much floor space is dedicated to each category?
Including SKUs as part of your ABC analysis makes it easy to avoid out-of-stocks for high demand items while managing and disposing of excess or inactive inventory. It can help in designing strategies for low-performing products such as repurposing, reworking, finding alternative selling channels, or reducing prices.
To get the most out of your ABC analysis, set up reports for each of the categories. Combine these reports with any other dataset known in your unified back-office solution to get the most complete set of insights into your SKU’s performance.
Scaling Your Business
As your inventory rises and company expands, “growing pains” can creep up on you. Since the primary role of SKUs is to track your inventory, a well-designed SKU architecture allows you to scale efficiency and maximize profitability during periods of growth. It can work the other way, too. If some of your products were already disappearing, this can increase. This can also lead to poor inventory management decisions and low inventory reporting accuracy, all adding up to unreliable results.
How many SKUs will you sell?
For B2Bs, it’s relatively easy to grow from a dozen SKUs into the hundreds. All it takes is a few partnerships with new suppliers or for a manufacturer to start issuing a new version or product line. As your product catalog grows, even the smallest SKU-related tracking or accounting error can play a detrimental role in your overall financial performance. Your SKU information should be shared between all systems.
Using a central database to distribute your SKU information will avoid misidentification. A Digital Operation Platform gives you a central source to manage your SKUs. From there push the SKUs to your sales channels, PIM, 3PLs, WMS and more. This will give you maximum inventory visibility, operational efficiency, and helping you take advantage of sales opportunities
Is your ERP and DOP ready?
If growth is in your plans, a spreadsheet quickly becomes obsolete as an SKU management tool. A distribution ERP software or DOP like Marello boasts enhanced technology change management tools. It offers a real-time view of stock activity, recommending ideal stock levels based on demand, as well as identifying trouble areas such as supplier lead times, and stocks already in transit. An ERP or DOP also helps you optimize stock in order to improve profitability, such as reducing carrying costs, reducing obsolete stock, ordering costs, and taking advantage of opportunities within the company such as spreading inventory across multiple locations.
Is your eCommerce platform ready?
A powerful B2B eCommerce platform should be able to:
- Support high volumes of SKUs (1 million+) without the impact on the site’s performance
- Integrate with your ERP, PIM, POS, fulfillment management, and financial accounting software ensuring data consistency across all your systems and helping you make better decisions regarding inventory.
When assessing various eCommerce solutions make sure to ask about any limits on SKU number or API requests that you can make to sync your systems. As many vendors may have hidden costs when it comes to high SKU and API request numbers that are common for B2B businesses.
That is why it is important to pick your B2B eCommerce and DOP solutions carefully, opting only for the ones built for the complexity and scale of large B2B commerce businesses. More about eCommerce software architecture: single-tenant vs multi-tenant cloud.
For privacy, you’ll need to comply with your local data privacy laws. And, if you accept credit card payments, you must be PCI DSS compliant among other regulations.
OroCommerce is a B2B SaaS eCommerce software that supports millions of SKUs and automates many inventory processes via cap-free open restful APIs, generates reports, and helps businesses track inventory across multiple catalogs, stores, and locations.
Marello is a digital operations platform for unified commerce management. It gives eCommerce teams unprecedented visibility into customer orders, inventory, fulfillment, helping businesses offer a unified eCommerce experience across their sales channels.
The SKU strategy you adopt plays a big role in preparing you for the future. The naming architecture and implementation of your SKU numbers will make a difference in how you manage not only your inventory but also finances, work productivity, reporting accuracy, as well as your marketing and customer experience. As the competition increases in the B2B eCommerce arena, businesses that better track their stock levels and quickly react to market demands will win the hearts and minds of customers.
Make the Most of SKUs in eCommerce
Looking for more tips on using SKUs in your eCommerce business? Whether you’ve got questions about B2B eCommerce, SKUs, warehouse, or supply chain management, don’t hesitate to reach out to us.
This blogpost was written together with Marloes Vriend, communications manager at Marello. Marello is a Digital Operations Platform which unifies backend operations. One of the most important parts of doing this is SKU management.