Definition
A Stock Keeping Unit (SKU) is a unique alphanumeric identifier assigned to each distinct product variant in a company's inventory system, enabling precise tracking, management, and analysis of individual items throughout the supply chain. This fundamental inventory management tool distinguishes products based on any attribute that affects their storage, sale, or tracking—including size, color, style, packaging, location, or any other characteristic that requires separate inventory accounting. Unlike universal product codes (UPCs) which are standardized across all retailers, SKUs are internally generated identifiers that organizations customize to their specific operational needs, embedding meaningful information about product attributes, categories, suppliers, or warehouse locations directly into the code structure.
Understanding Stock Keeping Units
The concept of SKUs emerged from the fundamental challenge faced by growing businesses: how to efficiently track and manage increasingly complex product assortments without confusion or error. Before SKU systems became standard practice in the 1960s and 1970s, retailers and distributors relied on product names and manual recordkeeping, leading to frequent mistakes when similar items were confused or when the same product appeared under multiple naming conventions. The SKU solved this problem by creating a systematic, machine-readable language for inventory that eliminated ambiguity.
Modern SKU architecture extends far beyond simple identification numbers. Intelligent SKU structures encode valuable information directly into the identifier itself, functioning as a compressed data package that employees can interpret at a glance. For example, a SKU formatted as "SHI-MEN-BLU-L-001" might indicate a shirt (SHI), in the men's department (MEN), blue color (BLU), large size (L), with a sequential variant number (001). This hierarchical structure enables warehouse workers to quickly identify products during picking operations, helps purchasing teams aggregate orders by supplier or category, and allows analysts to segment sales performance by any embedded attribute without accessing detailed product records.
The proliferation of SKUs presents both opportunities and challenges for modern businesses. While extensive product variety can capture broader market segments and increase customer satisfaction, each additional SKU multiplies inventory complexity. This phenomenon, known as SKU proliferation, occurs when companies continuously add product variations without retiring underperforming items, gradually inflating carrying costs, warehouse space requirements, and operational complexity. Research shows that in many organizations, the top 20% of SKUs generate 80% of revenue, while the bottom 50% of SKUs contribute marginally to sales but consume disproportionate resources in storage, handling, and system maintenance.
Core SKU Components
- Unique Identifier Structure: Alphanumeric code format that ensures no two distinct product variants share the same SKU, typically ranging from 8-16 characters and following company-specific encoding conventions
- Attribute Encoding: Embedded information within the SKU that represents product characteristics such as category, subcategory, size, color, supplier, or warehouse location, enabling rapid identification without database lookup
- Inventory Tracking Mechanism: Digital linkage between the SKU and inventory management systems that records quantity on hand, location, movement history, and replenishment status in real-time
- Sales and Analytics Foundation: Data structure that enables granular performance analysis by connecting each SKU to transaction records, profit margins, turnover rates, and customer purchase patterns
- Multi-Channel Synchronization: System integration that maintains SKU consistency across physical stores, e-commerce platforms, warehouses, and third-party marketplaces to prevent overselling and stock discrepancies
SKUs in Practice
A sporting goods retailer launching a new running shoe model faces immediate SKU management decisions that will impact operations for the product's entire lifecycle. The shoe comes in 12 colors, 15 sizes (men's 7-14 in half sizes), and two width options (standard and wide), creating 360 potential SKU combinations. Rather than creating all 360 SKUs immediately, the inventory manager analyzes historical sales data showing that 80% of shoe sales occur in sizes 9-12, neutral colors account for 70% of purchases, and wide widths represent only 15% of volume. They initially create 84 SKUs covering the high-probability combinations, with systems configured to generate additional SKUs on-demand if customers request uncommon variants. Each SKU follows the format "RUN-M-[COLOR]-[SIZE]-[WIDTH]-[SEASON]" enabling warehouse staff to locate products efficiently and allowing the purchasing system to automatically aggregate reorders by supplier and color family. This strategic SKU rationalization reduces initial inventory investment by 65% while maintaining 95% service level fulfillment.
Related Concepts
- UPC (Universal Product Code): Standardized barcode system used globally to identify products across different retailers, assigned by GS1 and consistent regardless of where the product is sold
- SKU Rationalization: Strategic process of analyzing SKU performance to eliminate low-velocity items, consolidate redundant variations, and optimize product assortment for profitability
- Product Variant: Different version of the same base product distinguished by attributes like size, color, or packaging that requires separate inventory tracking through distinct SKUs
- ABC Analysis: Inventory categorization method that segments SKUs into groups based on their contribution to revenue or profit, typically showing that a small percentage of SKUs drive majority of value
- SKU Velocity: Rate at which individual SKUs sell over a given period, used to determine optimal stocking levels, warehouse placement, and inventory investment priorities
