Stock Keeping Unit (or SKU) is the tracking code that a retailer uses to keep track of inventory. SKU’s are unique to each retailer as they are defined taking into consideration different attributes such as color size, weight, composition, batch, and even location. By no means is this list complete, but the idea is every retailer would define SKUs taking into account, the attributes that are most relevant. For example, a shoe retailer might create SKUs that show a product’s details, such as color, size, style, price, manufacturer,and brand. Whereas a fashion retailer might also include composition or type of handiwork along with the aforementioned attributes, define SKUs.
Is SKU The Same As A Product?
Not really. SKU is a definition of an item at the most granular level, which is why it is very important in terms of:
- Inventory tracking: SKU codes are typically used to keep track of the inventory at hand and in transit. Since they are defined as per the business peculiarities, they provide the most accurate picture of inventory.
- Recommendations: A SKU definition typically includes detailed attributes as described above. Given a user’s shopping pattern, SKUs are very helpful in finding related SKUs that a user might be interested in.
- Forecasting: The forecast at SKU and store level is as detailed as you can get. Although it requires a lot of expertise and efforts, a demand forecast for each SKU and location is invaluable input for any retailer.
A product, on the other hand, can be thought of as a consumer-facing grouping of items, rather than an inventory item. A product can have multiple SKUs that differ in one attribute, such as color or style.
An example, a “Formal Shirt for Men” can be thought of as a product, which can have multiple SKUs for different colors and different size combinations of the same style of the shirt.
Other Uses For SKU Definition
Although primarily used for inventory, SKUs can be used for other purposes as well. Since all the possible attributes an item has, can be modeled into SKU definitions, they can help analyze and answer specific business questions, for example:
- Is there any correlation between geography and color preferences. A question can be framed like, do the southern states prefer light colors in, formal shirts.
- Which attributes of an item influences the purchase decision most. Is price the primary deciding factor or composition of items decide the purchase decision.
- Which type of products are sold together, can we decide on based on attributes which items complement other items.
As you can imagine SKU definitions are a wealth of information and can help with new product introductions, profitability, product discontinuation, markdowns, assortment planning and of course inventory optimization that includes reordering, replenishment, and redistribution.