The Concept of Stock Keeping Units (SKU’s)

Companies like Wal-Mart are often credited with bringing in technology to the retail business. Prior to multinational companies introducing technology, retail was just a mundane business which was run without the use of any electronic or sophisticated retail systems. However, all that has changed now as retail is at the center of many technological innovations. Most of these innovations happen around the area of inventory management.

The leaps and bound innovation in the area of inventory management would not have been possible without the creation of the business concept called stock-keeping unit (SKU).

In this article, we will have a closer look at the concept of stock-keeping units (SKUs) as well as how they help advance the cause of technology.

What is a Stock Keeping Unit?

A stock keeping number or an SKU is a number which needs to be assigned to every piece of physical inventory which a company owns. This number is assigned because it makes it easy to track the movement of products through the system electronically. An SKU need not necessarily be a single product or a package containing a multitude of products. However, it could be either one of the two.

For instance, wholesalers usually define an SKU as a package containing multiple products. Hence, if they are selling t-shirts, they would define an SKU as a box containing three t-shirts. On the other hand, retailers may define an SKU as a single t-shirt.

The SKU definition is done based on the needs of the business and the volume of products that flow through it. It needs to be understood that the definition of SKU is internal to the company. Hence, each company will have a unique SKU system which will be known only to itself and its partners. This is where the SKU system is distinctly different from the universal product codes system.

Why is the Concept of SKU Important?

The concept of SKU is so important because it has formed the basis of all automation. Prior to the SKU concept, businesses had to count the inventory that they had on hand physically. Since inventory is seldom stored at one location, this used to be a tedious and expensive exercise. Also, there was a time lag between the depletion of inventory and businesses, realizing that the inventory has actually been depleted. Therefore stock-outs were common.

The SKU concept helped in the creation of barcodes. These barcodes were then fitted on the SKU’s as a part of the procurement process. The barcodes had to be removed from the SKU’s as a part of the sales process. Therefore, the number of units that a company had on hand could be easily ascertained electronically. There was no need for counting and manually deducting the inventory from the system.

Also, once inventory went below a certain level, the system could be automated to trigger orders which would be sent to third party suppliers. Therefore, SKU’s and barcodes were instrumental in ensuring that stock-outs became an extremely rare occurrence.

Other Advantages Provided By the SKU Concept?

There are several other advantages which were provided by the SKU concept. Some of them have been listed down below:

• With the advent of SKU’s tracking products became easier. Businesses could identify exactly how many products were flowing at which stage of the supply chain. This made it easier to reconcile stock and as a result, identify shrinkage. Once the point of shrinkage was known, the company could then identify the root cause and then fix it.

• The SKU system also allowed companies to analyse past sales data within a few minutes. Hence, companies can now easily figure out which of their products are being sold relatively quickly. This insight allows them to stock the right products, which in turn increases the turnover and the profit margin.

• SKUs are being strategically used by online businesses as well. It is the SKU information which allows companies like Amazon to increase their sales by providing helpful information about similar products.

  Companies like Amazon tag their SKU’s with unique information. They also tag similar products with the SKU information. Hence, once a customer decides to make a purchase, the SKU number of the purchase is then used to find out similar products and display the same to the users. This helps Amazon and other online retailers drastically increase their sales volume by cross-selling products. Also, it increases customer satisfaction since the system automatically prompts the customer to buy related products which the customer may have forgotten about.

• The SKU system has also made the life of store personnel easier. For instance, earlier, the store personnel had to physically hunt the inventory at a store. However, now the salespeople can simply use their computers to accurately determine whether or not they are carrying a certain product in stock. This saves time and also increases their efficiency.

The bottom line is that SKU’s are now being used everywhere. Brick and mortar stores, as well as online retailers, are simplifying their business processes using the SKU model. SKU’s are also simplifying the operations of the warehouse as well as fulfillment centers.