Guide to What Is a Stock Keeping Unit (SKU) for Online Business Beginners

SKUs - Stock Keeping Unit - are utilized by retailers, e-commerce vendors, warehouses, product fulfillment centers, and service providers to monitor inventory levels. If you are seeking an efficient approach to inventory management, this blog post will be a must-read as it provides valuable information on the definition and the importance of SKUs in online businesses, as well as the benefits of using them.

For retailers and wholesalers, stock represents a significant financial investment and plays a crucial role in their sales, purchasing, and inventory processes. Therefore, keeping careful track of that stock is essential for maintaining the long-term success of their business.

What Is SKU & the Importance of It

SKU, which is used by most companies worldwide, is an efficient tool for managing inventory items. So what is SKU? And why is it essential in businesses?

Definition of Stock Keeping Unit (SKU)

A Stock Keeping Unit (SKU) is a unique identifier code used in eCommerce and retail businesses to track inventory and sales of individual products. SKUs are alphanumeric codes that are assigned to each unique product item or variant, which can help businesses manage their inventory, track sales, and analyze their sales data.

SKUs typically contain a combination of letters, numbers, and symbols and can include information such as the product type, color, size, and other attributes that differentiate one product from another. For example, a red T-shirt in size small might have an SKU of RT-SM-RD-001.

Read more: SKU vs. UPC: What's the Difference & Which Is for Dropshipping?

Importance of SKUs in Online Businesses

SKUs are crucial for every online store which wants to make its products and services up to the mark. Here are the main essential aspects of SKUs for all types of online retailers and e-commerce businesses:

Product identification: SKUs contain details about the product manufacturer, type, color, size, etc. Their primary function is to aid managers in identifying products for the routine operations of their company. Whether you operate an online store for fresh products, accessories, fashion, or technology, incorporating SKUs into your workflows is likely advantageous.

Warehouse management: SKUs make it easier to locate which items are available in inventory and which are out of stock to communicate with warehouse servers to replenish the stock promptly. This results in the timely execution of all picking, stocking, and packing operations, reducing the likelihood of errors and minimizing inconvenience.

Multi-channel management: E-commerce enterprises often use various platforms and channels to sell their products, including their website, Facebook, Instagram, Amazon, and other online or offline retail outlets. In such cases, SKUs are particularly significant because they ensure that products are not mistaken for one another and can be efficiently replaced and reordered as needed.

Components of an SKU

Stock Keeping Unit consists of four main components that are product identifier, product attributes, stock location, and variants or options. When combining these components together, you will obtain an SKU code for the product according to its category for easy classification and arrangement. In addition, you can customize how these components are combined to suit your business needs.

Product Identifier

Every SKU contains a 2-3 character identifier that indicates the broadest classification to which the product belongs. This identifier may refer to the department, product category, manufacturer, or supplier. You can easily and quickly locate any items within your store based on the identifier.

Product Attributes

The same effects can be assigned to different SKUs depending on various attributes. Those refer to the critical characteristics of a product, such as brand, size, color, material, price, etc. For instance, a medium blue t-shirt manufactured in 2021 could be labeled “TS-BL-MED-21.”

Stock Location

Stock items that are to be sold are stored in designated stock locations. A company can decide which SKUs to keep from production to order fulfillment. It is possible to have multiple stock locations, each with its own unique address, and you can assign names to them based on their respective areas.

Stock locations are used to manage SKU inventory, including raw materials, processed goods, and finished products. This enables businesses to track available SKUs for sale and collect their availability across one or more stock locations.

Variants or Options

Options or variants of an SKU refer to any additional or customized service a customer can select when placing an order. Including such options may impact the price or delivery time of the SKU. Any extra service charges will be automatically added to the item's total cost. SKU variants can be services such as personalized prints, customized wrapping, engraving, etc.

Benefits of Using SKUs

For any e-commerce business, SKUs play a crucial role in inventory management. Here are five key benefits of using SKUs to monitor and regulate stock levels.

Streamlines Inventory Management

SKUs are highly significant notations critical to any business's success in a shorter time frame. They facilitate robust and efficient inventory management, which helps to track online product orders and automatically triggers reorder requests for the same product. SKUs offer a faster and better connection to the world and are advantageous in maintaining and replenishing inventory levels.

Enables Accurate Tracking of Sales and Stock Levels

By utilizing SKUs in your inventory, you can gain precise insight into sales and inventory quantities, which in turn, assists in making more accurate sales forecasts. This helps you to make informed decisions about when and how to replenish inventory.

You can also use this data to identify any underperforming variations of a product. For instance, if you sell the same sweater in different colors, you might notice that the mustard yellow one is not selling and is taking up space in your warehouse. You could, therefore, put it on sale to clear out the excess inventory.

By identifying fast-selling or slow-selling items at the SKU level, you can better forecast demand and optimize your product catalog to boost sales based on customer preferences.

Simplifies Ordering and Receiving of Products

SKUs not only simplify the inventory management process for businesses but also contribute to customers' convenience and swift product ordering and receiving. These crucial identifiers enable quicker product identification and streamline the picking and packing process, reducing errors and improving delivery time to customers.

Furthermore, SKUs are beneficial when customers require assistance in locating particular items, such as varying sizes of a product, as employees can use SKUs more effectively to assist them.

Facilitates Efficient Order Fulfillment

SKUs are critical for efficient order fulfillment since they enable managers to keep track of product variations accurately. Managers may make severe errors during order fulfillment without assigning SKUs to online products and solely relying on product names. For example, a website that sells women's bags could receive a customer's request for a specific size and color, but a warehouse manager may not be familiar with the different variations and may pack the wrong item.

Helps Identify Top-Selling Products

When websites are integrated with reporting software, SKUs aid in automating the reporting process on stock levels, sales, returns, and other factors. With the help of SKUs, this software can efficiently collect and analyze data to provide managers with insights into which products are popular among clients.

SKUs in Dropshipping (AliExpress & Shopify)

When it comes to dropshipping, SKUs can be highly beneficial in managing inventory and preventing phantom inventory while pinpointing when to order new items so your merchandise products are never out of stock.

Popular e-commerce platforms like AliExpress and Shopify offer various features for merchants to establish and run an effective online store. In Shopify and AliExpress, SKUs are assigned to each product, enabling simple identification and inventory level tracking. SKUs also determine product availability, pricing, sales, and stock levels within the platform.

SKUs encompass crucial product information such as size, color, and other distinguishing features and can comprise alphanumeric characters. This feature allows merchants to efficiently manage their inventory, both in and out of stock, streamlining inventory control and customer service processes. By utilizing SKUs when dropshipping on Shopify or AliExpress, merchants can prevent the following problems:

• Running out of the requested stock.
• Mixing up orders.
• Sending the wrong items to customers.
• Losing inventory tracking.

SKUs in AliExpress and Shopify can also be exported to your dropshipping stores. Many dropshipping tools support these features. For example, with DSers, you can use this tool to import dropshipping products to your online store. Then, the  products you import will have AliExpress/Shopify SKUs. Managing all the products with various online stores will be much easier.

Conclusion

Effective inventory management is critical for businesses of all kinds, and it begins with Stock Keeping Units (SKUs) that contain information about a product's type, brand, design, size, color, and price.

SKUs enable retailers, suppliers, logistic companies, and e-commerce businesses to manage their inventory effectively, allow them to track and analyze sales performance, and ultimately, offer a superior customer experience. Reach out for more helpful guides for eCommerce business on DSers Blog.