Inventory Management

The Essential Guide to SKU Strategy

Introduction

In the world of big data, unique identifiers are king.

One type of unique identifier is called a SKU, or Stock Keeping Unit, which is also referred to as an Item Number. All products necessitate SKUs because it distinguishes them; no two SKUs are the same.

CPG companies use SKUs as a means of tracking and managing inventory. And as supply chains become more and more complex, it’s critical for brands to be able to track products across the entire supply chain — full visibility in real time.

Without a consistent SKU strategy in place, CPG brands might come up against order and inventory management problems that could impact any future automation and overall scalability. The following article outlines the steps CPG brands can take to build a proper SKU strategy.

What Exactly Is a SKU?

One way CPG brands internally identify products is by assigning each of them a unique code, called a SKU, or Stock Keeping Unit, which are essential for tracking inventory. As previously mentioned, SKUs are also referred to as Item Numbers; the terms are interchangeable.

Again, no two SKUs are the same.

SKU vs. UPC

SKUs/Item Numbers are not the only unique identifier associated with consumer packaged goods. In fact, a number of codes are used to uniquely identify products, depending on where a product is along the supply chain.

Example of a generic UPC barcode.

A SKU, for instance, is not to be confused with a UPC, or Universal Product Code, which is a barcode standard used for retail packaging. When a product is created, it is given both an Item Number and a barcode. Though they are both unique identifiers essential to managing inventory, SKUs and UPCs are used differently.

CPG brands create Item Numbers for internal purposes, particularly for tracking inventory. SKUs/Item numbers enable brands to track orders and see their inventory across all locations. These SKUs are typically alphanumeric and vary in length (~8-12 characters). UPCs are standardized (12 digits, universal), machine-readable barcodes that are encoded with data visually attached to product packaging regardless of where it’s sold, be it a brick-and-mortar store or an online marketplace.

Other Unique Identifiers: EAN, GTIN, ASIN

There are also a number of other unique identifiers, such as GTIN numbers and EAN barcodes, which are just as recognizable as UPC codes. EAN/UPC barcodes are “the longest-established and most widely-used,” according to GS1, which standardizes unique identifiers for retailers and distributors alike.

Meanwhile, e-commerce giant Amazon has created its own unique item identification system. Once an item is uploaded into the Amazon catalog, it’s given an ASIN, or Amazon Standard Identification Number.

How to Create an Alphanumeric SKU Strategy

SKU codes are used to distinguish products. And since no two SKUs are the same, CPG companies need to have a scalable item strategy in place.

Here are a few basic principles CPG brands can follow to create a SKU system for its products, as well as its raw materials and components.

1. Consider Current and Future Products Variations

When creating a SKU strategy it’s important to know the extent of your current product offerings — all segments, formats, sizes, and other variations that differentiate these items.

It’s also essential to be able to envision what’s to come. What does future innovation look like? Anticipating extensions to product lines is an essential consideration, as there is a direct relationship between scaling and SKU creation.

2. Design the Alphanumeric Code (SKU)

Consider our favorite make-believe CPG brand, Green4Life. Green4Life specializes in premium home cleaning products that are “made with nature-derived ingredients you can pronounce.”

Let’s use Green4Life’s #1 selling product, an unscented surface cleaner called beGone, as an example, and run with the following SKU number: GSCU16SP0832. Here’s how the SKU code breaks down:

  • G = Green4Life (brand)
  • SC = Surface cleaner (product type)
  • U = Unscented (product sub-type; scent)
  • 16 = 16 oz (measurement of individual unit)
  • SP = Spray bottle (type of container for individual unit)
  • 08 = Number of units (base products) in an inner case pack
  • 32 = Number of inner case packs in an outer case pack

Keep in mind that SKUs will vary based on the number of units per case pack. In other words, the SKU for one base unit of beGone will be slightly different from one inner pack, consisting of eight base units.

Example of a product’s packaging lifecycle. Notice that each unit/pack comes with its own unique identifier. (Image source: GS1)

Additionally, CPG companies often white-label their products, manufacturing and marketing them without their brand name attached. SKUs for those products may begin with a W, for White Label.

For your raw materials and components, the approach is similar. Choose either:

  • CP = Component
  • RA = Raw Material

Here, let’s choose a component. Then choose a package size for it:

  • CB = Corrugated Box

Then, assign a case/box size, based on a predetermined measurement standard (below, in inches):

  • 04 = Length
  • 04 = Width
  • 08 = Height

The SKU number for this component would be: CPCB040408.

Of course, CPG brands can amend this to make then numbers shorter (or longer for that matter), in order to develop a language convention that works effectively. The key, in any case, is consistently.

3. Actively Use SKUs/Item #s with External Vendors

Of course, communicating is much easier when two entities speak the same language. A SKU code, or Item Number, is a kind of language — a clear standard by which products are identified. It follows then, that good things are bound to happen when a CPG brand and its external partners speak the same language and identify products by the same SKU codes.

When internal SKUs are used consistently by external vendors (3PLs, distributors, customers, etc.), CPG brands can more easily track inventory levels, order quantities, and enjoy full visibility into their stock across all locations in real time.

A SKU strategy is essential to CPG companies, especially as they scale. As long as everybody is speaking the same item language, it won’t matter how many external vendors a CPG brand uses across its supply chain.