Stock Keeping Unit

Updated on January 3, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Stock Keeping Unit Meaning

Stock Keeping Unit is a method of categorization of inventory (depending on its nature, size, color, price, packaging, etc.) for logistics and strategy purposes. It is a useful internal metric for any organization. However, it varies from one organization to another depending upon the nature of its products and services. It is not identical for all products, only for those belonging to the same SKU.

Stock Keeping Unit

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The categories help in inventory management and analysis, and periodic data, when aggregated, can be used for various kinds of strategies for the future, such as those of sales promotion or price variation, or even competitive strategies considering the SKUs of the competitors. SKUs are applicable for goods and services and, therefore, may be tangible or intangible.

How Do SKUs Work?

Stock keeping unit numbers are used for several purposes directly related to the POSPOSFull form of POS or point of sale can be defined as a final step in the completion of purchase where the customers pay for the goods or services that they are willing to buy at a retail store. It is an arrangement in a store where the sale of goods or services takes place which includes processing of orders, payment of bills, and check out too.read more (Point of Sales) framework. For example, whenever someone purchases a unit of goods or services from an SKU, the POS framework updates the SKU framework. This, in turn, informs the relevant teams to take necessary actions.

For example, in the case of an e-commerce purchase, the SKU framework updates the logistics team for the delivery of goods, the production team for the replenishment of stock, the management and marketing team for sales data analysis, the finance and accounts team for payment, and collection-related information and so on.

This implies that SKU is at the heart of bringing together each department of the organization and informing them to take the necessary actions required to complete the transaction and conduct post-sales research and analysis.

Examples

Stock Keeping Unit number is generally an alpha-numeric code assigned to each product. Most of the characters in the code remain common for products of the same SKU except for that part specific to the product, such as the size or the color or any such defining characteristic.

Example #1

ABC Mobile company produces different models of mobile phones, and even within one model, there can be many different variants based on internal storage or color or any other specification. A fast-sellingmodel x360 has a 32GB variant and a 64GB variant, and each of these variants come in 5 different colors from two different storage locations.

Therefore, the SKU is sorted like x360-32-red-A. This code gives the information step by step information of the product being sold at POS, and it implies that the red phone with storage of 32 GB and model number x360 needs to be supplied from storage house A.

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Example #2

Maersk is a global leader in the shipping domain. They handle supply-chain management, port operations, and freight transportation services.

They enter into contracts with big corporations and local businesses as their logistics partners. In 2022 alone, they doubled their warehouses and workforce by 20,000 new employees.

To supply the right set of products on behalf of their clients from warehouses in the size of a village can be a challenging task if not for their tracking system that tags each unit of products from hundreds of clients with the stock keeping unit number.

Applications

Let us understand how stock keeping unit analysis helps not only the company but also the customers through the discussion below.

  • Enable Delivery: These codes are transmitted from POS to storage units and the logistics team, which collects the required items and delivers them to clients.
  • Replenishment of Stock: Depending upon the demand estimates, the production department is informed about the required units to produce and replenish the inventory for future sales
  • Profit & Collection Analysis: Finance teams work on the numbers to come up with estimated profits from the current and expected sales and the give their insight to the management regarding what level of production is ideal
  • Strategizing: The management develops strategies for sales promotions, future pricing, and other marketing-driven activities based on these numbers.

Advantages & Disadvantages

Despite stock keeping unit number helping companies reach their customers or clients on time with the right products, there are a few aspects that work counter-productively for them. Let us understand the advantages and disadvantages of this concept through the discussion below.

Advantages

  • Inventory Management: It reduces delivery delays by constantly replenishing the sold products and therefore keeps the delivery period optimized. Further, it also keeps a check on excess inventory because people may prefer buying black color phones more than pink color ones. Therefore excess production of pink variants might be unprofitable.
  • Competitive Strategy: When competitors launch a new product in the market or are about to launch the same, each organization analyses its SKUs and sees if they already have the product or need to develop it not to lose the market shareMarket ShareMarket share determines the company's contribution in percentage to the total revenue generated within an industry or market in a certain period. It depicts the company's market position when compared to that of its competitors.read more. Further, as in the soft drink market, when one player reduces the price of the products, the other player also follows the strategy for the given SKU, for example, the size of the bottle, so that it retains its market share.
  • Market Analysis: Stock Keeping Units provide a detailed analysis of what the market is buying more, and therefore they give a direction to future product development. For example, if the market is buying more sedans, it would be less profitable to increase the production of SUVs for auto manufacturers. So it attributes sales and profitability to products and services.

Disadvantages

  • More of an Internal Metric: Even though it is believed the sales promotion can be conducted on the SKU basis, but the consumer is not aware of SKUs, it is an internal metric, and therefore, sale promotion is more practical at the UPC level and thus can be imitated by competitors.
  • Code Should be Easy: The Stock Keeping Unit code should be easy to understand, and therefore it can include special characters or can’t be encrypted. This can give competitors a better chance of predicting the organization’s strategy and planning their actions better. However, highly innovative technology is being used for SKU creation, making it difficult to unravel.

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