What is the Stock Keeping Unit?
Stock Keeping Unit is a method of categorization of inventory (depending on its nature, size, color, price, packaging etc.) for logistics as well and strategy purpose and is a useful internal metric for any organization. It varies from one organization to another depending upon the nature of products and services offered by it and is not identical for all product only for those which belong to the same SKU.
For example, If a biscuits and cake manufacturing company have to come up with SKUs, it could be based on the flavors of these items or the size and price of the items, or if it produces these products with different packaging for a different geographical region, even that can become an SKU.
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 strategy considering the SKUs of the competitors. SKUs are applicable for goods as well as services and, therefore, may be tangible or intangible.
How Does It Work?
They are used for several purposes, and it is directly related to the POS (Point of Sales) framework. Whenever someone purchases a unit of good or service from an SKU, the POS framework updated the SKU framework and this, in turn, informs the relevant teams to take necessary actions.
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For example, in 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 depart of the organization and informing them in taking the necessary actions required to complete the transaction and conduct post-sales research and analysis.
Example of Stock Keeping Unit
Stock Keeping Unit 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 which is specific to the product, such as the size or the color or any such defining characteristic.
For example, a company might produce 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. Suppose a model x360 might have a 32GB variant and a 64GB variant, and each of these variants might come in 5 different colors from two different storage locations.
So the SKU could be something like x360-32-red-A. This code gives the information step by step information of the product being sold at POS, and it will imply, the red phone with storage of 32 GB and model number x360 needs to be supplied from storage house A.
Applications of Stock Keeping Unit (SKU)
- 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 based on these numbers for sales promotions, future pricing, and other marketing-driven activities.
- Inventory Management: It reduces the delay in delivery 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, and 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 see if they already have the product or need to develop it so that it doesn’t lose the market share. 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 the auto manufacturer. So it clearly attributes sales and profitability to products and services.
- 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 therefore 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 strategy of the organization and plan their actions better. However, nowadays, highly innovative technology is being used for SKU creation, making it difficult to unravel.
This has been a guide to Stock Keeping Unit (SKU) and its meaning. Here we discuss example, application, and how does the stock-keeping unit work along with benefits and limitations. You may learn more about financing from the following articles –