Any business that manages some form of inventory needs to have a functional system for dealing with that inventory. This holds true for any business model, whether you're reselling products as is or using them as the raw ingredients to make new products. Creating a set of SKU numbers is a simple and practical way to do this.
TL;DR (Too Long; Didn't Read)
An SKU number can tell you what a product is and where it's stored. It can even convey information about size, color and other key details.
SKU Meaning and Explanation
The acronym SKU is short for stock-keeping unit, which simply means it's a piece of inventory of which you want to keep track. Assigning a unique number to each SKU you order or keep on hand is a pragmatic way to track those inventory items.
It also has the advantage of working equally well for businesses of any size. Once they're created, you can track your SKU numbers in anything from a handwritten ledger to a complex and sophisticated whole-business accounting system. Business schools call this "scalability" because it means your inventory system can scale up and grow along with your business.
It's Important to Get it Right
You could just generate a random, meaningless number for every product you carry, but that's not usually how an SKU works. It's a much more powerful tool if you use the numbers you create to tell you something about the products they describe.
Suppose, for example, you sell variations on a product that come in multiple sizes and colors and are sold through different departments of your business. Ideally, the SKU system you create should convey those details in every number. That way, it's much easier for you and your staff to know what's on hand and where it can be found.
Building a Good SKU
Ideally, a good system of SKUs should start with a key identifying prefix. This can be whatever makes sense for your business: a product category, a manufacturer, a department or any other meaningful major factor.
Next, create sets of digits to identify major subgroups within a category. If your product is shoes, for example, the prefix might identify athletic footwear, while the next few digits differentiate between men's and women's, and the next identify individual types of shoes, such as cross-trainers or soccer cleats. The remaining digits can just be sequential and indicate individual styles of shoes within those categories. The digits can be numbers, letters or any combination of both.
A Hypothetical SKU Example
Suppose your hypothetical shoe store carries dress and casual shoes, athletic shoes and both fashion and work boots. You might opt for a three-digit prefix for each category, with dress shoe SKUs starting with a one, casual shoes starting with a two and so on.
Next, add a single letter designating men, women, boys or girls and perhaps another pair of letters or numbers to indicate the manufacturer. A final few digits – three or four will usually be enough – can differentiate among individual styles and sizes and finally the specific shoe. A size 8 boys' soccer shoe from Acme Athletics, then, might have an SKU number formatted as 321B-AA-080123.
It Doesn't Have to Be Tangible
A well-planned SKU system can include anything you sell and want to track, even if it's not an actual product. If you run a computer store, for example, you might have SKUs for repair hours or virus-checking services in your system alongside those for laptop cases and ink cartridges. In the same way, a restaurant's computer might have SKUs for gift cards or the mandatory gratuity added to some private parties or catering functions.
UPC Codes Are Different
If you're impatient to get up and running, you might be tempted to just use the UPC codes already printed on many products as your SKU numbers. That's not usually a good idea, though, for a number of reasons.
For one, universal product codes are just that: universal and not at all under your control. The manufacturer can drop or change a UPC at any time, which is at best a costly inconvenience and at worst a logistical nightmare if you've been relying on that number. More fundamentally, though, it's a bad idea because like a random number, it doesn't pertain to your business and therefore doesn't take full advantage of the SKU's potential.
Fred Decker learned business fundamentals at second hand as an insurance and mutual funds broker, and at firsthand as a retail store manager and the chef/proprietor of his own restaurants. He has written hundreds of business-related articles for sites including Zacks.com, Chron.com, Vitamix.com, Bizfluent and GoBankingRates and many others. He was educated at Memorial University of Newfoundland and the Northern Alberta Institute of Technology.