How to Master SKU Management for Your Ecommerce Business

Last updated on May 17th, 2022 at 04:09 pm

According to the National Retail Federations Security Survey, the retail industry lost over $61 billion to shrinkage in 2020. While theft is a significant contributor, many of these losses are due to administrative and data entry errors. These can add up and seriously impact your bottom line over time. Knowledge is power when it comes to SKU management, and the better you understand your stock levels and product movement, the better equipped you’ll be to make informed decisions for your business.

Keep reading to learn why SKU management is essential for your ecommerce business and how a total retail operations platform like Flxpoint can help.

What Is a SKU, Anyway?

A “stock keeping unit” or SKU is an alphanumeric code that retailers use to track products from supplier to warehouse to customer. Often, SKUs consist of eight characters—both letters and numbers.

It doesn’t matter if you’re a brand new business owner or a skilled retail veteran, if you make your own products or stick to dropshipping, you likely have a SKU management system in place or know you need one. You may understand the basics of SKUs, but few know why they’re critical to inventory management and how they work behind the scenes.

Are SKUs Universal?

Depending on a product’s characteristics, such as manufacturer, cost, price, and size, a particular SKU is assigned. These numbers are unique to your business and can be tailored to meet a retailors specific needs—unlike a universal product code (UPC). While two products can have the same UPC, their SKUs will always be different.

When purchasing products from suppliers, you’ll notice that every product comes with its own UPC. If you’re manufacturing your own products, you’ll need to label your goods with UPCs.

What Is SKU Management?

SKU management is integral to accurate inventory management. An ecommerce inventory management software with a SKU management system helps identify, track and categorize sellable items using an alphanumerical code. This process allows retailers organize their inventory, as all product information and attributes can be accessed quickly by a SKU (such as how many units are in stock).

For example, imagine you sell jewelry. It may not seem helpful to label an item with “385SAPHN,” but it’s a lot more efficient than using “Sapphire Necklace” to search your inventory. If you sell identical products with different gems, you need a separate SKU for each type of item.

If you have an extensive product catalog, SKU management is essential. While your business may start simple (packing orders in your garage at home), managing SKUs becomes vital as you grow, add to your catalog, and sell more products.

When working with a third-party, such as Walmart or Amazon, managing SKUs properly allows you to track inventory across fulfillment centers and sales channels seamlessly. Then, new orders can be confidentially picked, packed, and shipped. Retailers can do all of this through a warehouse management system (WMS) which helps store data related to product SKUs, so employees can easily pull up product details.

Why Do Ecommerce Businesses Need SKU Management?

With proper SKU management, you can access all inventory items’ information. Having this data at your fingertips means improved order accuracy and a streamlined fulfillment process.

Increased Buyer Insights and Sales Analytics

You’ll make better decisions regarding product replenishment when practicing SKU management because you can easily pull sales and inventory data for each SKU. This information will help you identify selling trends, forecast demand, and eliminate slow-selling products.

Connecting all of your tools in a single system is a significant benefit for ecommerce retailers, as it ensures your applications talk to each other clearly. With an integrated ecosystem, you can compare all sorts of information from different platforms and sales channels to identify new or missed sales opportunities.

Improved Customer Experience

When you understand your inventory and can better predict future demand, you’ll be more likely to satisfy your customers. They’ll receive their orders as promised in a timely fashion, even when their orders or shipping needs are more complex.

And when shopping in-store, SKUs help improve customer experience by ensuring that your product pricing and inventory are always spot-on. Plus, if a customer is searching for an item, searching a SKU in your POS can help employees quickly locate the item and make the sale. A product’s SKU will identify accurate pricing as customers check out, and your inventory management system is automatically updated to reflect inventory amounts.

Less Waste

When you’re tracking product expiry dates and dead stock, you’ll have a better view of which products need to be sold first. At the same time, you can replenish inventory in high demand before you run out. There is less risk of stocking out or buying too much with a SKU management system in place.

Increased Warehouse Productivity

Poor SKU management not only produces physical waste but also wastes time. If your staff can spend less time sorting or entering data or picking and packing orders, they can focus on more critical, value-adding tasks such as upselling or other sales strategies.

Fewer Logistics Headaches

The ecommerce supply chain is fast-moving, and inventory levels are continually changing. By implementing an inventory and order management software that includes SKU management features, you can reduce the risk of overstock and stockouts. With the right software, you can update product information, analyze SKU performance, replenish stock, fulfill more orders, offer better customer service, and reduce human error throughout the supply chain.

What Are Best Practices for Ecommerce SKU Management?

There are no hard and fast rules for creating SKUs, but there are some general guidelines that will make them cleaner and easier to use both for employees and business partners as well as inventory management systems.

Stick With a Standardized Naming Convention

To avoid confusion and ensure the success of a new SKU management system, create a standardized naming convention for your SKUs. One example of a simple SKU framework is the “manufacture-color-size” format.

It’s also essential to stick with the same number of alphanumeric digits (8-12). Don’t overcomplicate it—the shorter the code, the easier it is for your team and business partners to work with.

Eliminate Letters That Look Like Spaces, Numbers, Accents, or Symbols

When creating SKUs, think about whether your naming convention may cause confusion. For example, the letter “O” and the number “0” look similar, even identical, when using certain fonts. Don’t ever use the uppercase “I” because it can be mistaken for the number “1.”

It’s also best practice not to include special characters such as “%” or “/.” You’re implementing SKUs to make inventory more manageable, so don’t introduce symbols that may be confusing or hard to read.

Group SKUs by Similarities

Let’s say you’re selling the same necklaces we mentioned earlier—a single style that is made with several types of gems. You aren’t limited to the exact product variant, so you can advertise that product online with all the different colors it comes in. That way, if the customer first sees the necklace made with a ruby but would prefer a sapphire, you can easily display the different options to them.

By grouping SKUs by similarity (such as gemstones), you can set up your sales channel to show multiple options for a single product.

Arrange SKU Characters by Importance

When assigning a new SKU to a product, think about how you would describe that product (i.e., Spring 2022, Necklace, Silver, Sapphire). What are the product’s most identifying—and important—attributes. For example, you may have a new necklace design each Spring, so you specify the collection followed by more minor details.

Calculate Reorder Points

Some products simply sell faster than others, so you wouldn’t reorder these at the same rate as other items that sell less often. This is when you need to calculate a product’s reorder quantity, which you do by multiplying the average daily units sold by the product’s average lead time:

SKU optimal reorder quantity = average daily units sold x average lead time

Determine SKU Ratio

When you’re interested in knowing how each SKU impacts ecommerce sales, you must calculate your SKU ratio. A SKU ratio refers to the number of SKUs in a gross profit range divided by your total number of SKUs. Then, you multiply this number by 100%.

To calculate SKU ratio using a spreadsheet, do the following:

  1. Create four columns in a new spreadsheet (SKU, cost of inventory, sales price, gross profit)
  2. Creat the gross profit ranges (i.e., less than $5, $5-10, etc.)
  3. Insert the SKUs that fall into each gross profit range
  4. Multiply the number of SKUs in each of the four gross profit ranges by 100% to determine the SKU ratio

Compare SKU Ratio and Sales Ratio

Next, you’ll want to compare this to your sales ratio. Using the same gross profit data used to determine your SKU ratio, add a new column that includes the number of sales units per gross profit range.

Then, divide this number by your total sales units and multiply the total by 100%. This process will identify your lowest- and highest-selling SKUs.

Optimize Inventory by Simplifying and Removing Low-Selling SKUs

One of the most valuable benefits of using a SKU management system is the ability to confidently cut products that don’t contribute to your business’s bottom line. To stay in the black, it is vital to determine slow-moving SKUs and optimize inventory by discontinuing them while paying more popular products more attention. Otherwise, you’ll pay the price in high inventory storage costs and potential deadstock from out of season, expired, or outdated goods.

How to Simplify SKU Management With an Ecommerce Automation Platform

Manually creating, updating, and managing SKUs may seem a little tedious—because it is. Luckily, you can automate SKU management. Automating your SKU creation, organization, and analysis reduces costs and improves the accuracy of your data.

Analyze Reports Related to SKU Performance

Collating and interpreting SKU data can reveal critical information about your products, allowing you to increase profitability by making certain adjustments dramatically. Many retailers never look into this granular level of data and only assess their sales and marketing performance at a campaign level. However, doing this provides limited visibility, which means you may miss several issues with individual products.

If you can collate data at a SKU level, you’ll access insights that you wouldn’t have time to derive from your data manually. With complete visibility and insight into your inventory’s journey, you can align product performance with your overall revenue and profitability goals. You will benefit from data-driven decision-making that allows you to become more competitive in a challenging retail climate.

You can optimize your sales and marketing strategies with better product performance data. These improvements will significantly impact your ability to get ahead.

Manage Kits and Bundles Easily

Kitting and bundling features allow you to boost revenue by combining multiple products from your catalog into a single bundle that entices your customers to buy more. When using a SKU management system to organize product data, you can offer product kits and bundles to your customers.

Using a streamlined SKU naming convention leads to more organized inventory, making it easier to fulfill bundles.

Eliminate the Risk of Human Error in Inventory Control

When you move away from a manual inventory management system, you can eliminate the risk of human error. If your team makes frequent mistakes when performing manual tasks, the cost can eat into your company’s profits in the long run.

Automated SKU management can reduce this risk and produce precise and reliable results. Plus, you’ll have a less-frustrated team with more energy to put into your business.

Identify, Organize, and Track Inventory With SKU Management Software

SKU numbers help you identify, organize, and track inventory when used correctly. Because SKU numbers are made of various letters and numbers, you have a tremendous amount of flexibility, which makes it easy to develop a SKU management system created specifically for your business.

Embracing SKU management will help you and your team better merchandise your sales floor or sales channel, efficiently serve customers and maximize sales. All of this leads to a more efficient and more profitable ecommerce business.

Pairing these best practices with a total retail operations platform like Flxpoint will provide your business with the tools you need to scale. Flxpoint delivers a fast, flexible way to integrate and automate your retail operations. Talk with an expert today to learn more.

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