What is SKU Code and Why Use It in Business?

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The SKU code and the undeniable benefits of its adoption in the company.

The SKU code is a cryptic alphanumeric language used by companies to efficiently manage inventory in warehouses.

It is a unique code used in retail and especially by all those businesses that operate in e-commerce. Thanks to the SKU code, it is possible to operate more simply and quickly, keep track of all products available in the warehouse, and initiate the storage procedures for goods more smoothly.

SKU codes are created by companies based on the composition of the inventory, keeping in mind that this cipher will make it easier to exchange information with customers and suppliers. It is essential in fulfillment operations, which is the procedure that automatically starts when a customer places an order and immediate communication between the warehouse and the retailer must be initiated.

What is the SKU code and what does it indicate?

SKU is the acronym for Stock Keeping Unit, and it is the unique alphanumeric sequence used by medium to large companies to track items in the warehouse, locate them efficiently, and prevent confusion with similar items.

The SKU code is made up of several values that allow for internal cataloging, such as price, size, or color, and other indicators that facilitate communication with customers and suppliers. Although it resembles the ISBN barcode, it should not be confused with it, as the SKU code indicates not only the type of item but primarily its location in the warehouse. This implies that the same product can have different SKU codes, depending on where it has been stored in the warehouse.

Another function that this alphanumeric sequence serves is the categorization of items by minimum sales unit. This indicator is very useful for businesses to conduct accurate inventory and optimize stock, especially in logistics departments that can operate more efficiently.

How is an SKU code generated?

Before creating an SKU code, a thorough analysis of the inventory, the product to be coded, and the needs of the customers must be conducted. After analyzing all the elements, the next step is structuring, choosing the most suitable sequence to meet the needs of the parties involved, resulting in a division into minimum sales units.

To illustrate the concept, it may be useful to analyze an example. As a model, we can refer to what might happen in a company that deals with clothing, specifically footwear. In this case, the structure of the SKU code starts from product indications, such as: type of shoe, model, color, and size. Each variation of the item will have its own unique SKU code, which will indicate a different position in the warehouse from that occupied by another similar item, due to a different size or color.

This example serves to illustrate not only how the structuring of an SKU code occurs but also how important it is to effectively plan its creation, as a superficial construction could negatively impact the warehouse and, in general, all operational processes of the company.

For some businesses, the SKU code has become indispensable, the key element that regulates modern logistics and lightens the workload of every commercial sector.

How to create an effective SKU code?

Creating confusion with a poorly structured SKU code is not that difficult, especially when it comes to cataloging items in a very large warehouse. For this reason, it is good to keep in mind some tips that will prevent mistakes in the creation of the code. To describe the goods effectively, it would be advisable to:

Insert a letter as the first value of the SKU code.
Divide the sequence with dashes to facilitate reading.
Create short alphanumeric codes that use abbreviations.
Avoid inserting zero, as it can easily be confused with the letter "O".
Do not use special characters since some warehouse management systems do not recognize them.
Reflect on what the customer most often asks about a particular item and include that indication in the SKU code.

For convenience, many companies prefer to delegate the creation of the SKU code to specific programs, such as ERP systems. For operational management, it is necessary to use WMS software that connects directly to the ERP.

SKU, EAN, and GTIN: what are the differences?

Each product has different codes, and although they may seem similar, each one serves a specific function. This is the case for the codes: SKU, EAN, and GTIN.

The GTIN code is the Global Trade Item Number, and it is a type of classification used to identify the product, its origin, and to market items through large distribution channels, including online ones, such as Amazon, eBay, Alibaba, etc.

All commercial items have a GTIN barcode, and depending on the country where the item will be sold, they may have different lengths. The large family of GTINs is divided into: EAN, which stands for European Article Number and is used in the European market; UPC, which stands for Universal Product Code and is the identification code used in North America; JAN, which is the Japanese GTIN code; ISBN, used to classify books; and ITF-14, which is used for multipacks.

Many people think that the SKU code and the GTIN code are the same thing, but they actually differ in many aspects. The GTIN code, and in this case the EAN used in Europe, unlike the SKU: is not alphanumeric but is based solely on a series of numbers; usually has 13 digits and a barcode; is created according to precise international standards and managed by the global organization GS1; does not describe the product much, but serves to identify the factory, the company, and the exact origin of the item; is not used within the warehouse but is used to introduce goods to the market; is a type of universal classification that remains the same and does not change during various stages within the distribution chain. The family of EAN codes is further divided into EAN13, EAN8, and in some cases, such as for printed materials, also into EAN2 or EAN5.

So to identify a clear difference, it can be said that the SKU is used to manage items within the company and describes the product, while the GTIN, of which the EAN is a part, provides information about the manufacturer and the origin.

Why is the SKU code useful in a business?

Using the SKU code has undeniable advantages, especially for the logistics department, but for the sake of consideration, it is right to analyze one by one all the benefits that come from the application of the SKU code in various operational phases.

Product traceability translates into greater efficiency and productivity. The ability to divide inventory into smaller units allows for tracking items in storage based on their individual characteristics. This type of facilitated tracking helps identify stock levels and avoid the infamous stockouts.
A greater amount of data helps businesses forecast sales. Fluctuations in supply and demand, market peaks, and sudden drops can be predicted and identified more quickly and accurately.
Through e-commerce, attention can be shifted to other variants of the same product. The SKU code applied to online retail channels helps generate sales, as it allows for offering items that the customer initially was not considering, but which, thanks to a network of digital relationships, may be of interest to them.

The SKU code, although primarily used to organize stock in the warehouse, proves to be a useful tool for leveraging the complex architecture of online commerce and allows for fully exploiting all the potential of e-commerce.

How to avoid SKU Proliferation?

The logistics departments of modern companies operate based on increasingly complex mechanisms, and when you add the need for some organizations to reduce staff, it becomes clear how close we are to a breaking point. As if this weren't enough, some business sectors are under significant pressure, which in many cases is intensified by the demand for quick deliveries.

All these factors lead to a situation that more and more companies are facing, namely the sometimes disproportionate increase of items within the warehouse. This is a sneaky problem that at first does not seem so serious, but over time it transforms into a real SKU Proliferation. This term refers to the uncontrolled increase of goods in the warehouse, which not only poses a challenge for the logistics department but also negatively impacts the entire management, subjecting it to significant slowdowns.

An uncontrolled proliferation of products leads to high administrative costs and, in the worst-case scenario, saturation of the storage facility. However, there are some techniques that can help avoid falling into SKU Proliferation, such as triangulating turnover rates, conducting ABC analyses, and applying the Pareto principle. Using these systems allows for the reduction and elimination of obsolete items from the warehouse and optimizes the organization of space based on the periodic turnover of items that enter the market more frequently.

Typically, 80% of sales are concentrated on a product niche that represents 20% of the offering. Based on this principle, it is important to use the SKU code to quickly and systematically identify the products of greatest interest to the market and to swiftly dispose of everything that does not receive much response.

SKU Code and PrestaShop

The SKU code, as we have seen, is very useful for e-commerce, but where should this data be entered in the product sheet in order to associate it with the items in our online catalog? Simply by using the "Reference" field, which is the most suitable for this purpose and allows us to associate our SKU with all the combinations of our products.

Convert the SKU into a barcode.

There are many solutions to convert our SKUs into real barcodes or QR Codes, readable by scanners. Many solutions are free and online, convenient if we need to create a few codes and therefore do not want to install software on our PC. A good online service to generate our barcode is definitely http://www.barcode-generator.org/ or https://barcode.tec-it.com/it

Conclusions

The SKU code, if well-structured and utilized to its full potential, can be the strong support that every company in the process of organization and growth can rely on. The most important element is customization, as it would be pointless to generate or look for standard SKU codes. The more the SKU code is created based on the specific needs of the business, the more effective it can prove to be.

In conclusion, analysis, research, market surveys, and assessment of needs are the factors on which the structuring of every SKU code must rest. By leveraging this alphanumeric sequence based on the results obtained from the aforementioned checks, it is possible to achieve more accurate inventory management, enhance operations, and keep pace with the ever-changing market demands.

Discover how to obtain the GS1 code

Author: Loris Modena

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The SKU Code: What it is and Why to Use it in Business