Understanding SKUs: Purposes & Best Practices for SKU Creation

Understanding SKUs: Purposes & Best Practices for SKU Creation

If you’re a retailer or business, a stock keeping unit (SKU) is a must-know concept for your inventory management. SKUs are important tools for keeping your stock organized and your business operations efficient. Today Phase V is giving you the rundown on SKUs—what are they, what’s the purpose, and what practices you should follow when creating them. Let’s jump into it.

SKUs 101

SKUs are alphanumeric codes used to identify and track your inventory. SKUs are not to be confused with a universal product code (UPC) which is a barcode that also tracks products. SKUs differ because they’re for internal use in order to streamline inventory management. Businesses specifically use SKUs to differentiate the items in their stock. They not only uniquely identify different products, but also variants of those products. For example, size, color, size, and other characteristics can be identified with SKUs.

Why are SKUs so important?

As we mentioned, SKUs lend a hand in inventory management processes. Aside from that though, there are many useful reasons for utilizing them:

Inventory management: SKUs are how businesses can monitor stock levels. These unique identifiers tell companies which products are in stock, what’s running low, and what needs to be replenished.

Reducing errors in fulfillment: One of the most important purposes of a SKU is minimizing errors in the order fulfillment process. Having special codes means the right products are picked, packed, and shipped.

Customer satisfaction: A byproduct of using SKUs is an increase in happy customers. If the right products are being delivered quickly and accurately, you’ll likely see a more positive client-base and brand reputation.

Sales insight: Using SKUs enables you to get more detailed information on your sales. You’ll be able to see which products are selling and which aren’t. Thus, you can make more informed business decisions.

Best practices for creating SKUs:

Now that we’ve explained why SKUs are important, let’s talk about how to create them for your business. Coming up with these codes is simple, but there are some general guidelines you should follow to create a seamless SKU system for more convenient inventory management. When outsourcing to a 3PL like Phase V, you should use the strategies below for SKU creation.


  • Use a standard format: Create a consistent structure for your SKUs that includes relevant product information like size, color, and other unique information.
  • Don’t overcomplicate it: Make sure the format of your SKUs are generally straightforward so you aren’t causing any confusion or making it hard for your team to understand.

Meaningful codes:

  • Include key attributes: Including meaningful attributes about your products helps make them easier to identify.
    • For example, for a large blue t-shirt, a good SKU code would be TShirt-BLU-L.
  • Keep it simple: While you should include these unique attributes, avoid making your SKU too long or complex. Ideally, a SKU should fall between 8-12 characters. Your code shouldn’t exceed more than 30 characters.


  • Plan for growth: As your company grows, you should create your SKUs to accommodate future product lines and variations.
  • Use prefixes and suffixes: Using parts of the SKU that can be reused and expanded on allows you to make room for future products.
  • Avoid reusing SKUs: When a product is archived or retired, the SKU should not be used for something else. This way, you can have historical data of old products.


  • Compatibility: Make sure the format of your SKU is compatible with your inventory management system and other integrated softwares.
  • Automation: Use automation to generate SKUs, thus reducing human error.

Avoid similar characters

  • Don’t use similar characters: Avoid using characters that can be mistaken for one another such as the number zero and the letter O or the number one and the letter I.


  • Teach staff: Ensure your staff is properly trained and understands your SKU system to guarantee an efficient inventory management process.
  • Documentation: Always record your SKU creation procedures so they can be accessed for review.


  • Review your SKUs: It’s important to audit your business process, including SKU usage. Take the time to regularly identify any errors and find out how you can further streamline your operations.


  • Maintain cohesion across all channels: If your business uses an omnichannel strategy, make sure your SKUs match across all sales channels to avoid confusion and keep things consistent.


Overall, integrating a SKU system into your business can transform the way you manage inventory, fulfill your customer’s orders, and optimize your operational efficiency. Ultimately, this will drive better business performance and customer satisfaction.


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