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Stock Keeping Unit (SKU)

Definition

A Stock Keeping Unit (SKU) is a unique identification code typically used by retailers for the purpose of inventory management. This alphanumeric code helps to track the quantity, sales, and location of a specific product within a store or warehouse. The SKU system allows businesses to have precise control over their inventory levels and aids in forecasting demand for different products.

Phonetic

The phonetic pronunciation of “Stock Keeping Unit (SKU)” can be written as: Stock – /stɒk/Keeping – /ˈkiːpɪŋ/Unit – /ˈjuːnɪt/SKU – /ˌes keɪ ˈjuː/

Key Takeaways

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  1. Unique Identifier: Each SKU represents a distinct item in inventory, creating individuality for every product. This uniqueness can be determined by attributes like size, color, brand, model, etc. By doing so, it helps businesses maintain accurate inventory management.
  2. Easy Tracking: SKUs are essential in tracking the movement of goods. They enable businesses to monitor sales, returns, and stock levels for each specific product variant. This becomes extremely useful in predicting future inventory demand.
  3. Boosts Efficiency: By using SKUs, businesses can streamline and enhance various operations such as replenishment of stocks, handling customer queries, and processing orders. They make it quicker and easier to locate items within large inventories, significantly improving operational efficiency.

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Importance

The business/finance term Stock Keeping Unit (SKU) is important because it refers to a unique identifier for distinct products and services that a company offers. SKUs help to efficiently track and manage inventory, making it a crucial component of any business dealing with tangible goods. They can relay essential information about the product, such as its color, size, material, or warranty terms. The use of SKUs can streamline operations by providing precise data about the status and performance of each product, thus enabling smarter inventory management decisions and maintaining optimal stock levels. It assists in reducing storage costs, preventing stock-outs or overstock situations, streamlining the replenishment process, and enhancing overall customer satisfaction.

Explanation

A Stock Keeping Unit, or SKU, is a significant tool used as an identifier for tracking inventory or stock within the business. Its primary purpose is to facilitate the efficient management of a company’s inventory, streamline its operations, and optimize its profitability. SKUs constitute product details such as product type, brand, style, color, and size, making SKU tagging a systematic and organized way to keep track of the product variants. Essentially, it helps in tracking the availability of different product variants and in making informed strategic decisions based on a product’s sales performance.The role of SKU extends beyond inventory management and impacts various aspects of business decision-making. With SKU tracking, businesses gain insights into which product lines are performing well and what products are less popular. Using this information, they can adjust their production or stock to align with consumer demand. SKUs also play an essential role in ease of operational processing like shipping, receiving, and storing. They introduce an effective way to improve order management and fulfillment, reducing potential errors or miscommunications surrounding product identification. As a result, SKU serves as a crucial aid in improving the efficiency and accuracy of business operations, and consequently, customer satisfaction.

Examples

1. Amazon: Online retail giant Amazon utilizes SKU numbers to categorize and manage massive inventory counts. Each product sold, be it a book, electronic device, pantry item or clothing article, has its own unique SKU. Amazon uses these SKUs to keep track of inventory levels, sales rates, and to locate the exact warehouse location of every item.2. Walmart: Walmart, the world’s largest brick-and-mortar retailer, employs SKU numbers in both its physical stores and its online marketplace. Each variety and size of a particular commodity has its own SKU. For instance, a pack of 12 Coca Cola cans would have a different SKU from a pack of 24. Similarly, different colors or sizes of the same T-shirt will each have distinct SKUs. 3. Apple Inc.: Apple also uses SKUs in its inventory management. For example, an iPhone may come in various models, color options, and have different storage capacities. Each combination is distinguished by a unique SKU. So, an iPhone 12 Pro with 128GB storage and in Graphite color will have a different SKU compared to an iPhone 12 Pro with 256GB storage in the same color.

Frequently Asked Questions(FAQ)

What is a Stock Keeping Unit (SKU)?

A Stock Keeping Unit (SKU) is a unique identifier for distinct products in inventory. It can be any combination of letters and numbers picked by a company to represent their products. They are used for tracking inventory, revenue, and sales data.

Why are SKUs important in business finance?

SKUs are important because they help businesses to track inventory levels, identify best selling products, manage restocking processes, and analyze sales patterns. They also enable businesses to monitor profit margins and overall financial health.

Can two products have the same SKU?

No, typically no two products will have the same SKU. Each SKU is unique and represents specific product attributes like size, color, brand, etc. Different variations of a product will have different SKUs.

What is the purpose of using a SKU in inventory management?

SKUs help businesses manage their inventory more efficiently. By assigning a unique SKU to each product, businesses can easily track the quantity and location of their stock. This helps to prevent stock-outs or overstock situations.

How are SKUs created?

There are no specific rules for creating SKUs, and they can be a combination of any letters or numbers that a company chooses. However, it’s generally a good practice to make SKUs meaningful and systematic. They can include information about the product category, product characteristics, the supplier, manufacturing details etc.

How are SKUs different from UPCs?

SKUs are created by companies for internal use, meaning they won’t be the same across different retailers. UPCs (Universal Product Codes), on the other hand, are set by manufacturers and remain the same across all retailers. UPCs are also globally recognized and standardized, while SKUs are not.

Do online businesses also need to use SKUs?

Yes, online businesses also benefit from using SKUs. They allow businesses to keep track of their online inventory, manage online sales, and analyze customer behaviors. In fact, SKUs are crucial for large online retailers with an extensive range of products.

Related Finance Terms

  • Inventory management
  • Product identification code
  • Barcoding system
  • Point of Sale (POS) tracking
  • Warehouse organization

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