The Importance of the SKU in Supply Chain Management

How SKUs are Used

SKUs are used in supply chain management, order processing, data analysis, and even marketing.

Order Processing

Let’s start with the application of SKUs to order processing, because it’s a pretty easy concept to grasp. 

If you are a global, national, or regional distributor, wholesaler or manufacturer of physical products, your finished goods are scattered in various locations. When an order is placed, that inventory must ship from somewhere. So, the question becomes where?

In most cases, you want to ship from the location that incurs the lowest freight cost. So, you’ve got to know what inventory is in what location.

For example, you may have warehouses in California, Missouri, and Georgia with the bulk of your inventory in California because it has the highest sales area. If you get an order from Florida and don’t have enough inventory in Georgia, what do you do? Do you transfer inventory from California to Georgia, backorder a portion of the order, or ship from multiple locations?

By expressing the inventory and its location as an SKU, you can create algorithms based on user-defined rules to determine how and where orders are shipped. Instead of a human making the order processing decision, the decision is digitized. Based on the data you gather, you may move inventory from location to location. Which leads us to the second most common use of the SKU.

Supply Chain Management

SKU in supply chain management goes hand in hand. The SKU is how you determine inventory levels. When an SKU is plucked from the bin to fill a Sales Order, it is deducted from the on-hand inventory. 

Inventory on-hand is as important to know as your minimum and maximum inventory levels. Based on lead times, it can trigger a low stock warning to prompt the purchase of more inventory. Inventory on hand is also a factor in when calculating the cost of goods sold. 

SKUs can be used to track inventory on orders as well. In the order fulfillment example above, the scenario becomes different when you know that the product is on a truck in route to Florida and will be delivered the next day. 

Periodically, for warehouse management, financial accounting, and tax purposes, the quantity of SKUs on hand is physically counted and compared to the digital record in the process called taking inventory. This usually happens once a year. 

Data analysis

Where SKUs are particularly valuable is in helping a business be more profitable and productive. By analyzing SKU data you can:

• detect cyclical sales cycles
• identify theft and breakage
• determine best and worst selling products 
• uncover regional differences
• manage inventory turnover
• identify obsolete items

By using SKUs to provide transparency into inventory on-hand, it can even be a powerful sales tool for web-based sales. When doing their own product analysis, buyers want to know what you have available. But more on that later. 

Marketing

Let’s go back to those people buying your products. Many marketers use an SKU as the online product identifier instead of the UPC. If you use a UPC, buyers may search for the code and do price comparisons.

By leveraging SKU logistics to identify and promote your product, you’re guaranteed to present a unique product identifier that shoppers won’t find anywhere else, no matter how hard they scour the net. That’s because your SKU is unique to you.

SKU versus Product versus PIM 

As mentioned previously, the term SKU is often confused with the product. So, let’s break down the differences between your SKU, your product, and your PIM.

Remember, the SKU isn’t the UPC.

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The SKU is an identifier you generate for internal use. It isn’t the product code, but it can contain product identifying information, in addition to the warehouse and bin location.

Your product or UPC number is always 12 digits. It consists of a barcode and numbers. The UPC is created by the manufacturer and used by every wholesaler or retailer of the product. It identifies the manufacturer and information about the product (for example chocolate-flavored pudding has a different UPC than the vanilla pudding). It doesn’t include information about where the product is located in a warehouse. 

Your PIM is the database or other digital solution in which you store your complete product information. PIM stands for product information management. It’s how you keep product images, descriptions, and information consistent across your sales channels.

After all, you don’t want one product description on the internet and another in your print catalog and yet a third as part of an email marketing campaign. You will probably include the UPC as part of your PIM, but you may or may not include the SKUs. Your PIM may be as simple as an Excel spreadsheet or as sophisticated as a dedicated business application, like Akeneo.

Tips for Creating SKUs in Your Supply Chain

Now that you understand a bit about the SKU, you can imagine how important proper SKU management is for your eCommerce business.

But how do you go about creating them?

First, you will need to determine an SKU length and define the taxonomy. These decisions are based on how detailed you want your SKU to be. You can include information such as product manufacturer as well as attributes such as size or color. You can even create product categories. Because this identifier will only be used in-house, create SKUs that work best for your products and your company. For example, an SKU for a hotel supply distributor might be:

                                                763975Z

Where 76 indicates the fabric

3975 indicates the size (twin is 39” by 75”)

Z indicates a zippered mattress cover

You want to create SKUs that are easy to read by the humans who use them. That means it’s a good idea to group like products together. Let’s take a look at a simple FMCG eCommerce example. If you are selling coffee cups in multiple colors, you might assign the first part of the SKU “1006PC” to indicate it is a 6-ounce porcelain coffee cup and then use W to indicate white, R to indicate red, G to indicate green and so on while keeping the basic coffee cup code the same. 

The codes should be as intuitive as possible. A 1006PC-R might be the SKU for the 6-ounce porcelain coffee cup (1006PC) that is red.

To aid in creating unique SKUs, there are many code generators for free on the internet. Just identify your taxonomy and let the code generator go to work! Keep in mind that the more variations you have, the more digits your SKU will need to contain as it should indicate the characteristics of the item in the warehouse. 

You also want to avoid starting your SKUs with the digit “0”. Many data processing programs truncate leading zeros in numeric fields, so starting with a 0 may lead to problems with using data. 

Implementing SKUs in Your Business

Because SKUs will be used for multiple business functions, the implementation process should involve team members from all affected areas. SKU data may need to flow between business systems such as the eCommerce system, the ERP, the WMS, and other solutions that use stock data. 

The warehouse team will need to define their needs for SKU use in picking and shipping and maintaining loss and breakage data. 

Sales, marketing, and purchasing will all use SKU data to improve operations and results. Marketing will want to use SKU data to identify the largest profit generators to create promotions, sales will use SKU data to identify trends and create forecasts and purchasing will use SKU data to maintain proper inventory levels. 

These inventory levels include maximum and low stock levels as well as the re-order point and the restocking level. If inventory forecasting software is used, the SKU data will need to flow there as well. So, as you can see once implemented, SKU data will be used across many systems. And everyone will want reports, so the implementation must provide for the free flow of SKU data to prevent data silos from being created. 

eCommerce with Multiple Warehouses and Multiple Websites

When you’ve got one warehouse in one location or all of your products are drop shipped, SKUs are simple, product management is simple, but shipping may be slow and customers dissatisfied.

With multiple warehouses, you deliver products faster (a must in today’s environment), remain flexible, and reduce the risk of shrinkage and loss. This all increases profit margins and enhances the customer experience. 

But multiple warehouses add complexity. Add multiple channels and multiple eCommerce websites and you’ve got more layers of complexity than the average lasagna.

If you haven’t eliminated legacy silos and warehouse management functions yet, start planning your technology change management project first.

That’s because it’s crucial that your B2B eCommerce platform cuts through these layers of complexity like a knife. Whether it’s traditional, headless, single- or multi-tenant architecture, it’s crucial that it integrates.

SKU data must flow from each eCommerce channel to the WMS, ERP, and other solutions and then back again. Orders for shipping need to be routed to the closest facility with sufficient stock. If you offer the option of customer pick-up, the customer must be assured that the item is available in the requested location.

All of this routing and prioritizing must happen in real-time, as the customer shops online. It’s another reason your eCommerce solution must integrate with other systems.  

After all, your customers want to know their item is available before making a purchase. Telling your customers the quantity in stock and the location enhances the customer experience. Research published in the Harvard Business Review shows that when a buyer doesn’t see the product they want in stock, they don’t pick a substitute, they move on. And if your website indicates a product is in stock when it isn’t, you’ve got a credibility and trust problem that will be hard to overcome. 

Offering a backorder option may be one way to lock in a sale. Loyal customers may accept the wait if you indicate a restock date and either offer an option to buy now and ship later or inform the buyer when the stock status changes. 

Multiple warehouse operations also generate a high number of SKUs. Your solutions must be able to scale up and process increased amounts of data as your business grows. 

Any solution that limits your SKUs will be a problem in the future. 

And Now You Know…

Now that you understand SKUs, can you see their importance in improving company performance? These codes are the key to unlocking improved profits through better order fulfillment, more accurate inventory forecasting, and more effective marketing efforts. So, using SKUs can be a big benefit for those who just want to start a career in chain supply and for experienced workers.

Start Optimizing Your SKUs Today

Want to know more about SKUs? Not sure where to start? The pros at OroCommerce and Marello can help.

This blog was written in collaboration with Marello, a Digital Operations Platform for (e)Commerce. Built on OroPlatform, Marello is the application to streamline SKU in supply chain management. It helps out with order management, inventory management, making reports, and more.