SKU Management: 7 Strategies For Optimizing Your Ecommerce Inventory
SKU Chaos Strikes Again: Poor SKU management causes mix-ups in inventory, leading to fulfillment errors and customer dissatisfaction. Streamlining SKUs can mitigate issues like stock imbalances and delays, especially during peak sales periods.
Decoding SKUs for Inventory Success: SKUs, or Stock Keeping Units, help businesses track inventory efficiently. Each product variant has a unique alphanumeric code, aiding organization and differentiation by size, color, location, or other attributes.
Pick Your SKU Strategy Wisely: Businesses have flexibility with SKU types. Options like warehouse-specific, item-based, and category-based systems offer various advantages and require careful consideration for effective inventory management.
The Barcode vs SKU Showdown: SKUs are proprietary codes for internal tracking, whereas barcodes and UPCs are universal identifiers. All are essential but serve different purposes in inventory and sales operations.
SKUs to the Rescue: Effective SKU management improves order fulfillment accuracy, demand forecasting, and ROI. It aids in streamlining product updates and reduces inventory distortions, ultimately enhancing business efficiency.
Bad SKU management is bad for business.
Let me give you an example:
You finally took the plunge into multichannel selling. Having sold on your own ecommerce platform for some time, you were eager to expand to marketplaces.
Marketing and advertising campaigns were firing on all cylinders, and everything was primed for success.
But instead of glowing reviews, the floodgates flew open for complaints and negative reviews. Customers received the wrong items, and chronic delivery delays became the norm.
What went wrong? It wasn’t the logistics. It was your inventory.
Without streamlined SKU management, the same product is listed under different SKUs across your sales channels, causing fulfillment errors and bottlenecking your operations.
SKU confusion leads to a stockpile of issues like stock level imbalances, fulfillment delays, and lost sales opportunities.
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It doesn’t just happen when you’re expanding your business; it can also creep into your operations during busy sales events–from quick deals to big promotions like BFCM.
But if you can refine your SKU system, you’ll improve your inventory management strategy and supply chain efficiency dramatically.
Whether you’re new to SKUs or just looking for some strategy reinforcement, the tips in this blog can help transform your system from bad to robust.
For the uninitiated, we’ll start with the basics.
For those looking to fine-tune their existing SKU system, you can go straight to the expert-recommended strategies.
What is a SKU?
Stock Keeping Units (SKUs) are unique identifiers businesses assign to products to help track inventory and sales.
When you use SKUs, every product variant receives a different set of alphanumeric codes. Accounting for subtle variations in things like storage location, product type, size, and color, you can differentiate one unit from another and improve organization.
Let’s imagine a pet supply brand called Pepper’s Pawmily creating an SKU for one of its products:
- Brown (BR)
- Medium-sized (M)
- Dog collars (DC)
- Located in Aisle 1, Shelf 1 (A1) of its warehouse
The SKU number for this product could look like this: BR-M-DC-A1.
Any color and size variation or a change in warehouse location will result in a different SKU code.
However, not every business includes warehouse location in their SKU codes. Some, like Pepper’s Pawmily, for instance, choose to do so because they often reorganize their inventory.
Having location-based SKUs may simplify operations for them, but it requires constant updates, which may be unnecessary for your business.
To find out which type of SKU fits your operations best, let’s explore the different types below.
Common SKU types
You have complete flexibility to structure and format your SKUs based on your operational goals, warehouse workflows, and product lines.
These factors can influence your SKU numbering system, so take time to analyze the best approach.
The three main SKU types
Here are three foundational SKU types to guide you when making a decision:
| SKU type | When to use | Best for | Consider this |
|---|---|---|---|
| Warehouse-specific | If products are stored based on physical location in your warehouse | Faster fulfillment during busy seasons | Needs updates if warehouse layout changes; SKUs must match physical layout for smooth operations. |
| Item-based | If each product variation (size, color) needs its own unique tracking | Harder to track individual products; and ensure fulfillment aligns with product categories. | Can lead to "SKU overload"; tie each SKU to a specific location for efficient picking. |
| Category-based | If you want to simplify product grouping (e.g., all dog accessories) | Handling mass updates (pricing, restocking) | Harder to track individual products; ensure fulfillment aligns with product categories. |
Category-based SKUs
As you may have noticed, category-based SKUs offer more granularity than the other two types.
So let’s dive deeper into them.
These 6 SKU types might be exactly what the inventory manager ordered, to help you become more precise:
| SKU type | When to use | Best for | Consider this |
|---|---|---|---|
| Component parts | If managing parts separately from the main product | Quickly identifying parts in the warehouse | Synchronizing quantities and reorder points can be challenging; ensure all parts are available for assembly and tracking. |
| Custom-built products | If products require assembly or personalization before sale | Premium, personalized products | All components must be in stock; assembly happens pre-shipment. |
| Multi-item bundles | If you sell bundles of products as a single SKU | Upselling and cross-selling opportunities | Bundle items must be in stock together; track and ship together or from multiple locations. |
| Product collections | If grouping standalone products under one promotional SKU | Managing promotional offers across SKUs | Fulfill individual SKUs within the collection; the parent SKU isn’t sold. |
| Digital offerings | If selling virtual products or add-ons | Offering digital products as upsells | Digital SKUs need separate tracking; virtual fulfillment runs independently. |
To understand what each of these might look like, here’s a very pet-centric set of examples for all these SKU types:
- Component parts: SKU for a replacement buckle for Pepper’s Pawmily’s dog collars, tracked separately from the main product.
- Custom-built products: SKU for a personalized dog bed with options like fabric type and customer name.
- Multi-item bundles: SKU for a dog walking bundle, including a leash, collar, and waste bags.
- Product collections: SKU for a grooming set that includes a brush, shampoo, and nail clippers.
- Digital offerings: SKU for a virtual dog training course offered as an add-on to physical products.
With that out of the way, let’s talk about two other product identifiers that online business owners like you might confuse SKUs with.
Clearing the confusion: SKUs vs Barcodes vs UPCs
Alphanumeric characters, dots, and dashes make up your SKUs. They’re designed to improve internal inventory and sales tracking, as well as warehouse management.
Meanwhile:
Barcodes are a pattern of black-and-white lines that store product data like pricing and batch numbers.
Optical devices scan this encoded product information and translate it into a readable format.
Universal Product Code (UPC), on the other hand, is a standardized 12-digit barcode format recognized globally across retail systems to identify a product.
If the online pet store from earlier (Pepper’s Pawmily) and their competitors source the same cat litter from the same manufacturer (let’s say Pet Star), you can expect the UPC to be identical for all of them.
To sum up:
Barcodes and UPCs are the universal languages that speed up transactions from the supply chain to the point of sale. SKUs, on the other hand, are proprietary codes businesses set to manage inventory and streamline operations.
So, What is SKU Management?
SKU management is a structured approach to establishing, categorizing, tracking, and evaluating SKUs within an inventory system.
It’s an inventory management practice designed to optimize inventory levels and prevent both overstocking and stockouts—the two inventory management challenges that make any ecommerce brand cry foul.
Many run into both of them all the time, especially around the holidays.
Case in point: 80% of SMBs struggled with overstocking, but they increased purchase orders by 16% pre-holiday sales, presumably to avoid stock shortage.
SKU-level inventory management can help you avoid this obstacle because you’ll know which product variants are worth investing in.
You’ll also reap many other advantages, which we’ll dive into below.
Benefits of SKU Management for Ecommerce Brands
Instead of spreading marketing and purchasing efforts thin over several products and their variants, effective SKU management allows you to focus on a select few.
This targeted approach offers the highest potential returns in terms of:
Streamlined product updates
With centralized inventory control, changes to one SKU automatically sync across all channels.
Access to real-time inventory information can lead to better inventory control, improved sales performance, reduced labor costs, and better product management.
Real-life example:
Home and garden ecommerce shop Direct Plants’manual workflows led to missed sales.
They struggled to effectively manage their fast-changing product line (due to seasonal plants).
After implementing automated SKU management (using Linnworks and BigCommerce), they were able to track inventory movement across all selling channels even as demand soared.
Source: Linnworks
Improved order fulfillment accuracy
34% of retailers struggle to maintain inventory accuracy as order volume increases.
SKU management creates a logical warehouse structure that helps your team easily identify and locate products, reducing the risk of picking errors and improving fulfillment speed.
Real-life example:
Southwestern Rugs Depot sells unique area rugs online, and their patterns are quite specific, making them hard to sort through.
Their precise SKU tracking has enabled them to find products quickly, getting them to the hands of customers without delay.
Our efficiency makes for a happy customer and boosts our sales. We’ve seen repeat customers come back because they trust they’ll get what they want without hassle.
Good SKU management turns casual shoppers into loyal fans, driving our month-over-month growth.
Reduced inventory distortion
Inventory distortion has a hefty price tag. It’s close to $1.77 trillion, with $562 billion attributable to overstocks and $1.2 trillion to shortages.
By tracking SKUs, businesses have better stock visibility to ensure the right products are available at the right time.
Real-life example:
Take Yijin Hardware, for example. They struggled with inventory issues until they started using a cloud-based inventory management solution, Fishbowl, to track their SKUs more effectively.
According to Gavin Yi, founder and CEO, this has helped their manufacturing business reduce overproduction and waste.
Enhanced demand forecasting
SKU-specific demand forecasting takes things a step further than standard inventory forecasting. You don't just forecast per product type—you estimate the optimal stock level for each variant.
This targeted approach helps you maintain Goldilocks inventory level all the time—always just right.
Real-life example:
After experiencing limited growth due to poor inventory planning, boxing clothing, and equipment brand BOXRAW cut its overstock by £1 million using a forecasting solution (Sage’s Inventory Planner).
The tool factored in variants, vendors, warehouses, product categories, and other KPIs to give BOXRAW complete visibility of their products.
Source: Inventory Planner
Higher ROI
SKU management can help reduce operating costs and boost customer satisfaction. This provides some guidance on how decision makers can invest in products that perform well and avoid zombie stocks.
Real-life examples:
Cricketer Shop, an online cricket shop, improved sales by 15 to 20% after adopting SKU management.
Using Zoho Inventory, the brand was able to have a better picture of their product portfolio and even freed up an employee who was in charge of manually updating their order management system to focus on more meaningful work.
Furthermore, Yijin Hardware’s reduced inventory misalignment has:
..translated into cost savings, helping us offer more competitive pricing for clients. Additionally, knowing exactly where each part is in the supply chain makes shipping faster and keeps clients happy
Strategic product diversification
SKU management removes the confusion when expanding your product lines. When you have unique identifiers for each item, you can easily track and locate products in your warehouse.
Also, you can track stocks and fulfill orders quickly with a quick search in your inventory system—no more need for vague descriptions.
Real-life example:
When Helix Sleep introduced pillows, bedding, and accessories alongside its core mattress offerings, clear and distinct SKUs for each product variation helped them manage inventory smoothly.
Our ability to scale was enhanced, as each product had a unique identifier, making stock management straightforward and preventing inventory overlap or errors when fulfilling orders across different product lines.
Implementing tried-and-tested SKU management strategies is the key to reaping these benefits. Keep reading to discover industry-approved advice.
Simplifying SKUs: 6 SKU Management Strategies To Enhance Your Workflow
These 6 SKU optimization strategies can help your company put an end to expensive guesswork.
I talked to several brands and industry experts about their experience with SKU management, and they gladly shared their best tips.
To drive these nuggets of wisdom home: I’ll also show you how our fictional pet brand from earlier, Pepper’s Pawmily, carries them out to improve its operations.
Let’s begin.
1. Develop a logical SKU numbering system
SKU codes must be intuitive and descriptive to avoid mispicking, punching the wrong items in your systems, and other confusion. Therefore, they should also be clear and consistent.
Here’s a good piece of advice from SofaBedStore.com’s CEO Edward Bonpin:
Break the SKU into chunks and make sure pertinent details are included and should be easily identifiable (without a need for cross-reference).
Let’s look at how a pet retail store like Pepper’s Pawmily would implement this simple yet effective tip.
Here are some excellent tactics:
- Decide on the SKU Type. Pepper’s Pawmily opts for a warehouse-specific SKU type to streamline storage and workflow. They use the aisle and shelf location as the initial identifier.
| Warehouse location | SKU identifier | |
| Aisle A | Shelf 1 | A1 |
- Create a logical hierarchy of product categories. The owners organize and sort all products into high-level categories like pet types. Ex: Dog (D), cat (C), fish (F), hamster (H) etc.
- Set unique identifiers. They then break the categories down into each product’s specific attributes. Ex:
| Product type | Product size | Product color | SKU identifier |
| Dog Collar (DC) | Medium (M) | Brown (BR) | A1-DC-M-BR |
- Limit SKU characters. The ideal SKU code length is 8 to 12 characters. It shouldn’t go over 16 characters, because that can be too much. Pepper’s Pawmily sticks with the “A1-DC-M-BR” code and follows the same format for all products.
- Check for clarity. Upon reviewing all SKUs, they realize they often misread the number 0 as the letter O. Pepper’s Pawmily commits to using letters exclusively for sizes and digits for weights to avoid confusion.
Think of the SKU numbering system as the first layer of control. These standardized product identifiers optimize all inventory management processes, from procurement to order fulfillment.
Keep your naming conventions simple. It’ll be easier to understand and maintain consistency this way.
2. Automate SKU management with the right IMS
Human error is a major issue for 45% of warehouses worldwide. Automation removes it from the equation, which is why this technology should go hand in hand with SKU management.
The solution: Invest in advanced inventory management software (IMS).
Many of them provide automated SKU generation and barcode scanning to help minimize human error.
You should also choose a tool that seamlessly integrates with your ecommerce platform and tech stack.
When I asked why Yijin Hardware chose Fishbowl as its IMS, Yi explained that the platform “allows them to integrate seamlessly with QuickBooks, making accounting and stock tracking smoother. It also monitors raw materials and finished products in real time.”
In the case of Pepper’s Pawmily, for example, the brand often struggles with periodic reviews, replenishment, and other tasks because of its limited staff.
Its team chose Cin7 Core, which readily allows for wireless barcode scanning via a mobile app.
You can take a page out of the fictional brand’s playbook to discover the most appropriate IMS to support your SKU management strategy.
We highly recommend the following:
3. Set reorder points for each SKU
Maximize order management and prevent stockouts by setting reorder points for each SKU.
Reorder points are predetermined inventory levels that signal the need to replenish stock for a specific SKU.
An advanced inventory management system can take care of this for you by calculating and setting them based on real-time sales data, lead times, and safety stock levels.
If you don’t have one yet, you’ll have to go old school.
Calculating your reorder point by hand
Prior to adopting Cin7 Core, for instance, Pepper’s Pawmily needed to first identify their safety stock levels before calculating the reorder point.
To find out the reorder point for its perishable product, 30 oz cans of Pawfectly Organic Dog Food, the brand needs the following information:
- Maximum daily sales: 15 cans
- Maximum supplier lead time: 7 days
- Average daily sales: 8 cans
- Average supplier lead time: 4 days
Then, they need to run the safety stock formula:
Safety stock = (Max daily sales x Max lead time) – (Average daily sales x Average lead time)
Safety stock = (15 cans x 7 days) – (8 cans x 4 days)
Safety stock = 105 cans – 32 cans
Safety stock = 73 cans
To finally get the reorder point:
Reorder point = (Average daily sales x Average lead time) + Safety stock
Reorder point = (8 cans x 4 days) + 73 cans
Reorder point = 32 cans + 73 cans
Reorder point = 105 cans
However, this reorder point (105 cans) isn’t set in stone. There are many variables that influence SKU performance.
Imagine putting in all this work for every SKU you carry, only to end up with guesswork anyway.
Good thing, our fictional brand Pepper’s Pawmily came to their senses and switched to an advanced solution like Cin7 Core, which has Smart Reordering as one of its best inventory management features.
It’s solutions like these that make the cost of an inventory management system a no-brainer.
4. Analyze and rationalize SKUs
SKU rationalization is the process of streamlining a company’s product line by reducing the number of SKUs.
61% of executives plan to prioritize it to create a more profitable product mix. Fewer SKUs means you can invest more in high-demand items and save money on storage and handling costs.
Big players like Proctor & Gamble and Unilever and brands with complicated product lines like sensory compression clothing brand JettProof benefit from this approach.
Conducting periodic reviews helps with SKU rationalization:
Every quarter, we analyze SKU performance and phase out low-performers. The key is to do this gradually and communicate with customers to offer alternative products.
Let’s say every quarter, Pepper’s Pawmily conducts physical inventory audits.
Recently, the team discovered redundant and months-old SKUs in their system-generated reports:
The shop carried multiple sizes and scents of a cat litter brand. But only the 10-pound lavender and 20-pound unscented variants consistently generated sales. The 5-pound citrus variant was rarely purchased at all.
With this insight, Pepper’s Pawmily decides to minimize orders for other low-selling product variants and discontinue the 5-pound citrus SKU to make room for bestsellers.
5. Classify and group SKUs
Logical grouping simplifies stock picking and packing processes. Over time, it can also provide more accurate stock levels to avoid overselling or underselling.
We grouped products by key similarities such as material type (e.g., foam vs hybrid mattresses) and size (e.g., queen vs king).
By keeping related SKUs together, we improved our inventory organization, leading to quicker order fulfillment and less confusion during busy times
Home and garden ecommerce retailer Topiary Garden also did the same thing with SkuVault Core’s bundle function. Doing so helped boost their sales and seller health metrics on online marketplaces like Amazon.
Ultimately, grouping SKUs will depend on your strategy.
You can use an umbrella SKU to cover a specific bundle or category. Or you can use aisle and shelf codes like Pepper’s Pawmily (i.e., starting the SKU code with A1 for Aisle A, Shelf 1).
6. Leverage data and customer feedback to optimize SKU performance
Tracking SKU performance and listening to customer feedback helps you understand which products are selling well and which ones need adjustments, allowing you to make smart, data-driven decisions.
Tishman shared that doing so helped Helix Sleep maximize its profitability:
For example, if a certain mattress firmness consistently performs well, we allocate more marketing resources toward it and ensure optimal stock levels.
Conversely, if another SKU has a high return rate, we investigate why and adjust the product offering or discontinue it if necessary.
Good news is that you can count on your inventory management software to oversee many other SKU metrics, such as:
- Average daily units sold: Understand daily sales volume to identify fast-moving and slow-moving products
- Historical sales history: To anticipate seasonality and demand fluctuations
- Profit margin: Compare sales against costs (e.g., storage expenses) to assess financial performance
- Stock levels: Monitor SKU levels in warehouses and distribution centers to avoid stockouts
- Order tracking: Monitor orders delivered to end customers to improve customer service.
- Items in transit: Anticipate and resolve issues before they escalate during delivery
- Demand forecasting: Predict future demand for each SKU to maximize sales
Invest in a software solution with advanced analytical tools that meet all your inventory management requirements.
This takes the guesswork out of managing your SKUs, letting you make smarter decisions based on real data.
SKU Management Challenges And Solutions
I’ll give it to you straight: Having SKUs in place doesn’t eliminate all inventory problems.
If you don’t cover the tips above to implement a solid SKU management system, the following issues are likely to come about.
Fortunately, for you, I included expert-endorsed tips to fortify your SKU management strategy:
SKU proliferation
The majority of product-based businesses reported having 101 to 200 SKUs in their collections. This number increases as companies expand, bloating SKU catalogs and increasing carrying costs.
Recommended approach:
Regularly rationalize and phase out underperforming SKUs to prevent inventory clutter.
Look at your sales data often to identify underperforming SKUs that don’t generate sufficient revenue or meet certain criteria like minimum sales thresholds or percentage to overall profits.
Balancing a diverse product range while avoiding inventory stagnation has been tricky, but we’ve learned the importance of regularly analyzing SKU performance to make informed decisions.
Operational scalability
SKU systems are often designed to solve current inventory woes.
But if you don’t think long-term, you might not be able to accommodate any future product expansion and market growth efforts. Eventually, you’ll find yourself right back at square one.
Recommended approach:
Adopt an advanced inventory management solution and make sure your SKU naming convention is scalable.
Make sure you take future product lines into account and leave room for additional attributes or categories.
As we grew from a wholesale platform to a direct-to-consumer model, our initial inventory management system struggled to encompass new product categories and attributes.
By redesigning our SKU management system to be more scalable and intuitive, we overcame these hurdles and set ourselves up for future growth.
Inadequate training
Online retailers adopting SKUs for the first time or hiring new staff must train employees about SKU formats and processes.
Otherwise, they risk inaccuracies and order fulfillment errors that can disrupt operations.
Recommended approach:
Conduct onboarding and ongoing training sessions to help staff remain competent in managing SKUs.
And as I mentioned earlier, don’t overcomplicate your SKU codes because your staff will have a hard time mastering how they work.
Aim for a balance in their SKU system—detailed enough to track necessary variations, but not so detailed that it becomes unmanageable.
Preparing for these issues before they arise can lead to smoother operations and stronger customer satisfaction.
Final Thoughts
Seeing and understanding your inventory on an SKU level gives you the granularity you need to boost operational efficiency, decision-making, and customer experience.
Now it's time for you to put the strategies above into practice.
If you need more resources to brush up on inventory strategy essentials, you can start with these:
- ABC inventory analysis
- JIT inventory management
- Inventory Turnover Formula
- Cycle inventory
- Inventory Valuation Methods
- Perpetual Inventory System
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SKU Management FAQs
Check out some common questions and best practices to effectively manage your SKUs.
What’s the best way to assign SKUs for bundles or multi-item products?
Catalog all the individual items included in the bundle. Then, create a parent SKU for the bundle itself, and individual codes for the included items. Standardize format for all SKUs.
Here’s an example: A pet travel bundle (BND-TB1) may include a pet carrier (BND-TB1-001-PC) and a portable water bottle (BND-TB1-002-PWB).
How do I integrate SKUs with barcodes and RFID systems?
Use a barcode generator from providers like Barcodes Inc. to generate and download barcodes for each SKU.
For RFID, you’ll have to get RFID tags and RFID reader/writer hardware from suppliers like Zebra Technologies or Avery Dennison.
Run the provided RFID programming software to input SKU data into the tags, then place the tag near the reader to execute programming.
How often should I audit my SKUs?
Audit your SKUs at least once a year and any time you conduct physical inventory checks. However, you may consider more frequent audits for high-traffic items or during peak seasons.
