Whether you have a handful or thousands of product types in your ecommerce shop, it’s important to be able to keep track of each individual product at any given time. By assigning each product a Stock Keeping Unit (SKU) code, you can easily monitor it in your inventory system through the supply chain.

In this article, we’ll look at:

• What is a SKU code?
• How do you create SKU codes?
• What are the benefits of SKU codes in inventory management?
• How to use SKUs to optimize the returns process

What is a SKU code?

A SKU (Stock Keeping Unit) is a unique alphanumeric code assigned to each product unit in order to identify and track it throughout the supply chain. It serves as an important tool for inventory management, pricing, and sales tracking.

SKU codes are similar to, but distinct from, Universal Product Codes (UPCs), which are 12-digit barcodes that universally track distinct products through the global supply chain, following a coding system set by GS1. In contrast, SKUs are distinct to the brand that generates them, and they are used on an internal basis rather than by external suppliers, who would reference the product’s UPC.

How do you create SKU codes?

When creating SKUs, it’s important to build a consistent, predictable pattern that accounts for your product categories and their variations. You can either manually create your SKU codes, or automatically generate them with a tool like Shopify’s SKUGen.

Let’s say your ecommerce jewelry company has a line of hoop earrings, available in both gold and sterling silver. They can be purchased in either a small or large size.

In this case, the initial letter might represent the parent category, followed by a letter for product type, material, size, and finally, the specific product number out of the total available inventory for that variation.

The SKU for a small pair of sterling silver hoops might be: EHSS-125. (Earrings/Hoops/Silver/Small/Product Number). In contrast, a pair of large gold hoops might be: EHGL-097 (Earrings/Hoops/Gold/Large/Product Number). This categorizing system enables you to keep note of all of the distinct variations of your products, down to the individual unit level.

Your brand can also create custom SKUs for multiple products sold as a single unit. For example, your ecommerce shop might create a collection of complementary products that can be sold as a bundle for a discounted price, incentivizing customers to increase their average order value. In this case, the bundle’s metadata would include both the individual product SKUs as well as the bundle SKU code.

What are the benefits of SKU codes in running your business?

Once you’ve assigned a unique code to each product unit in your inventory, you can use your SKU codes to optimize inventory management and business forecasting, while enhancing your customer experience.

By using a point of sale system or inventory management tool to track your SKUs, you’ll be able to see how many products of each type and variation you have in stock at each location, including warehouses and brick-and-mortar shops. You’ll then have clear indicators of when you need to either order new stock or shift inventory from one location to the next: For instance, if your New Jersey warehouse location is nearly out of stock of the size XS Blanche swimsuit in red, but your Georgia location has 30, you might shift half of that inventory to the NJ warehouse, while simultaneously putting in a restock request with your manufacturer.

Setting up automated inventory management that tracks your SKUs means that you’ll be able to easily monitor the status of your inventory at any given time, with automated replenishment to avoid stockouts. You’ll also have clear visibility into which SKUs are gathering dust on your warehouse shelves, so you’ll have the data to determine when to discount or liquidate products.

Analyzing trends in SKU performance can help you optimize business operations by streamlining your inventory based on data insights: If you sell 5 size medium jumpsuits for every size small, you’ll be able to customize your re-order requests based on forecasted demand, helping you avoid overproduction of products that aren’t likely to sell.

Tracking SKUs down to the individual unit can also help you more easily respond to customer inquiries and support requests. When a customer is placing an order, they can see exactly how many units of the product you have in stock at each location, so you’ll be able to accurately share how quickly they’ll be able to receive it based on their location and whether they prefer to shop in-store or get the item shipped. Or, if a shopper has a support request after buying the item, you’ll be able to track the SKU through the supply chain, and will quickly become aware of any trends in manufacturer defects in a specific batch of products.

How to use SKUs to optimize the returns process

Building a comprehensive SKU system can also help your ecommerce business when it comes to the returns process.

It’s a given that up to 40% of ecommerce sales end up as product returns, so the ability to track inventory during the post-purchase cycle can help your brand monitor your supply chain and understand which of your returned merchandise items can be restocked in your warehouses for resale. Loop’s workflow features can help you easily set conditions for how each return is processed, based on a combination of SKU data and item condition data.

Pairing a comprehensive SKU system with a returns management platform like Loop can help you get access to improved business intelligence, including enhanced item grading and disposition data. You’ll have the insights into your reverse logistics supply chain to accurately determine where to route each of your returned SKUs, whether that means restocking, donating, liquidating, or recycling them. With more accurate inventory levels, you’ll also have improved predictions to determine when to re-order or discount your existing inventory, helping you maintain consistent inventory levels and meet customer demand.

Building a SKU system for your ecommerce business can give you the data intelligence to make smart decisions around manufacturing, inventory management, and pricing. With the right insights, you’ll be able to confidently meet customer demand and scale your business sustainably.

Want to see how Loop can help streamline inventory management with enhanced reverse logistics?