Let’s assume the following scenario:
You’re the owner of a retail store that sells sportswear in different sizes, colors, and patterns. As time goes by, your customers’ preference grows, and they opt for new designs of your products, resulting in a rapid increase in the SKU numbers of your products. Then, your retail inventory management becomes more tricky to handle, track, keep in stock, and pull data from.
SKU management can be a time-consuming and challenging process. However, if you have the right resources and systems in place, you can easily manage your retail inventory to better control your inventory and make strategic decisions for your business.
This article will walk you through the basics of SKU management and how our top-tier POS system, KORONA POS, can help you with inventory SKU management. Here are some of the key points we’ll walk you through in the blog:
Table of Contents
What Is SKU?
A stock-keeping unit or SKU is a number assigned to a product for inventory management purposes. The number is a code of letters and numbers that uniquely identifies and lists each product in your inventory.
Inventory auditing is the process of cross-referencing financial records with physical inventory and records. In other words, a SKU is a unique identifier assigned to each product for easier and more efficient record keeping.
SKU management is part of the inventory management subset. It allows businesses to organize their inventory better, as all information related to a particular product can be quickly consulted (such as the number of units in stock).
SKU management is essential if your business uses stock-keeping units. It helps you determine the cost of ownership of each product. Also, your inventory SKU management allows you to ensure that each product in stock meets your business financial objectives.
Good SKU inventory management guarantees a good optimization of your inventory and purchasing levels. On the other hand, poor SKU management leads to high inventory holding costs and less available capital. There are two ways to manage SKUs: manually or automatically.
Manual SKU management
The manual method entails calculating two indicators: the SKU ratio and the sales ratio. Once these are determined you can run a comparison.
How to calculate the SKU ratio?
First, go through your product catalog and list all your SKUs in a spreadsheet. For each SKU, write down the price, cost, and gross margin. Next, consider creating gross profit ranges in your spreadsheet and note how many SKUs fall into each range.
You can divide the number of SKUs in a range to the total number of SKUs (and multiply by 100 to give a percentage). This will give you your SKU ratio for each range.
How to calculate the sales ratio
The process for calculating the sales ratio is the same as the SKU ratio. With the same gross margin range, take the number of units sold in a given period. Then, divide the number of units sold in each gross margin range by the total number of units sold and multiply by 100. This gives you the sales ratio.
Compare your findings
Compare the SKU ratio and the sales ratio of each gross profit range in a spreadsheet. To better understand your results, you can chart these data to see the difference between your sales and SKU ratios.
Products that fall within the gross margin range that have a sales ratio that is significantly higher than the SKU ratio are the most beneficial. This means that there is a high demand for these products from your customer base, and you can generate more sales if you increase your marketing budget or inventory.
On the other hand, if you have products in the gross margin range where the SKU ratio is higher than your sales ratio, these items are underperforming. This simply means that supply is more significant than demand, and you need to reduce your inventory, or marketing, or even stop selling these items.
Automated SKU management
Manual SKU management can seem tedious and time-consuming. And since time is money, you need to think of a faster, cheaper, and more accurate way to analyze SKUs like automated SKU management.
As a retail or small business owner, you need to use software that can help you manage your inventory, automatically update it, and track your items and sales in real-time. The data collected from your inventory and sales will also improve your sales strategy and create more efficient purchasing and marketing processes.
SKU management is essential for your retail business because it provides access to specific information about each item in your inventory. It also significantly improves order accuracy throughout the picking and packing process in the warehouse.
Good SKU management gives you the data you need to improve inventory efficiency for each SKU to better predict consumer demand, reduce one-time expenses, and identify the best-selling products for better SKU replenishment. With the right point of sale software, SKU management can be optimized to avoid stock-outs and overstocks.
Example of an SKU application
Bob owns a small grocery store that sells a specific brand of bread in addition to 10 other brands of bread. Bob believes that since his store is small, there is no need to use SKUs on each brand.
One day, a customer walks into the store and asks if the store has a specific brand of bread. Bob recognizes the brand name and tells the customer that they have that bread brand and leads him to where the bread aisle is. He then sees that the store is out of stock on that bread brand and apologizes to the customer.
The next day, Bob sets up a meeting with his inventory manager, who says, “We should have a SKU for every product in our store – it’s inefficient for me to have to manually check to see if we’re running low on specific products every day.” Without an inventory system that incorporates SKUs, I have to subtract the quantities we sold from our inventory system manually.”
Following the manager’s suggestion, Bob subscribes to a POS system that can help him with inventory SKU management for each specific product.
With this setup, Bob can quickly check his computer system on each product and their inventory levels. He can even get alerts when individual products are running low, set up automated reordering, and run product analysis on every item in his store.
A SKU is made up of letters and numbers. The numbers and letters provide details about the product, such as brand, model number, color, etc. Each company follows its own way of creating SKUs for its products, and there is no incorrect way to create a SKU. That being said, there are some best practices when building a SKU for a product. Here are several of them:
1. Do not start SKUs with zeros
As a general rule, avoid using zeros at the beginning of your SKU names to prevent data storage problems. You will find some storage tools that do not consider zeros at the beginning of your SKU names. As an example, if you enter 04563 in Excel, you will save 4563.
2. Group SKUs by similarity
You can design your retail store in a way that shows the different options for a particular product by clustering SKUs by similarity.
For example, if you sell sports shoes and jerseys, and a customer comes into your store, you can show them the available colors. So, if the customer sees the shoe that comes in black but prefers another color that you have suggested, you can easily display the different colors available for that shoe. This also improves the customer experience. You can spot the different types of products in demand and the options that most customers prefer for that specific high-demand product.
3. Do not use confusing letters, numbers, and spaces
Do not use spaces or special characters. Creating a SKU with spaces or special characters can be confusing. Do not use letters that can be confused with numbers. Avoid using letters such as O and I, which can be confused with 0 and 1. It is advisable to use uppercase letters to prevent confusion when using letters. Also, keep SKUs short. Long SKUs can be difficult to read and may not work in some inventory management systems.
SKU management is an important element to better organize and track your product inventory. It also allows you to improve your inventory management and make forecasts. Good SKU management lets you know when to reorganize your inventory at the SKU level, the most profitable items for your business, and the ones that are selling the least.