WHAT IS SKU AND WHY IS IT CRUCIAL FOR EFFECTIVE INVENTORY MANAGEMENT?
Stock Keeping Unit (SKU) is a unique code that is used to identify each inventory item in a warehouse. Unlike universal product codes (UPCs), SKUs are not universal. Each business has its own set of SKUs for its merchandise. This means that a product with the same UPC can have two different SKUs from two different sellers.
SKUs are also unique and specific to each location. For example, if you have one product stored within two warehouses, you will need to create two different SKUs to allow for efficient inventory management.
Each SKU is associated with stock that is available right now and doesn’t include back-ordered stock to replenish the SKU in your warehouse. For this reason, SKUs are a key part of your inventory optimisation strategy.
SKUs are meant to be human-readable. Ultimately, your SKU is a shorthand way to record important product information, so the easier they are to understand, the quicker it will be for your floor staff to identify products.
SKU codes should help you identify the exact product variant you are looking for. Therefore, you should incorporate information on colour, type, size and any other significant variants into the SKU. It also makes a lot of sense to create the SKU code beginning with the most important information, followed by less significant attributes.
Making an accurate estimate of inventory can mean the difference between profit and loss. Not stocking enough inventory of popular items can be as damaging as trying to offload overstocked products. Moreover, inventory availability ultimately has an impact on your customer’s perception of your business.
Inventory management is the process of end-to-end stock tracking, from ordering, receiving and storage to packing and shipping products. A full understanding of how much inventory is left and how much is needed to fulfil upcoming orders, allows companies to maintain adequate stock levels. Forecasting and planning are crucial to responding promptly to clients’ demands and ensuring profitability.
Every product variation has an SKU, which means that every stock item has its unique code. Organising and identifying products using SKUs facilitates the reconciliation of stock levels, and significantly reduce inventory shrinkage.
Moreover, inventory categorisation, using SKUs, enables greater visibility of stock movements and helps identify where and how the stock has gone missing, minimising the opportunity for unaccounted missing. This will minimise unaccounted missing items or theft. In addition, SKUs help warehouse managers keep track of stock on-hand. A threshold can then be set and reorder point identified, which will indicate when a new purchase order needs to be made.
Choosing the right technology is critical to making the most of your SKU-based inventory management processes. Outdated manual systems no longer provide the efficiency and accuracy needed to maintain supply chain and warehouse operations.
Tracking Profitability – SKU Proliferation X Rationalisation
While SKUs can be beneficial in terms of identifying products, having too many of them can lead to an overall complex business operation. SKU management analyses the cost of productiong and storage against the profit generated for each unique inventory item. This analysis can help in determining which items are best sellers and which are underperforming. Not only does this give a clear picture of your major profit streams, but also helps you make strategic product decisions for future growth.
SKU proliferation usually happens when companies create variations of products to match unique customer preferences. The problem is that more SKUs can mean increased cost of production and maintainance. The demand for an SKU may not be high enough to swiftly move inventory. Moreover, in some industries new variants can cannibalise demand for existing products, resulting in a company addig an extra layer of complexity to their supply chain for virtually the same sales volume.
SKU Rationalisation is a decision-making process that determines if a product should be continued. There are various techniques for reducing or rationalising SKUs. One of the most popular is an GMROI Analysis (Gross Margin Return on Investment) where a ratio is obtained by dividing the gross margin by the average cost of inventory. If the ratio is above 1, the product is considered profitable. Products with a ratio under 1 are deemed unprofitable and may be discontinued.
SKUs are a shorthand way method categorising every inventory item that is stored. It helps staff quickly identify and efficiently pick products. SKUs also make it much easier to keep track of inventory at each DC location. Access to real-time inventory information, through a WMS, allows managers to make smarter stock decisions.
Finally, analysing attribute level data helps clarify the impact of each SKU on sales, helping managers decide which variations to add or eliminate from their distribution centre.
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