How to Manage Your Stock with SKU Numbers: Best Practice Guide

Not to be confused with a barcode, a Stock Keeping Unit (SKU) is an alphanumeric code used by retailers and fulfillment providers to identify and track individual products within a company’s inventory system. Every single item is assigned its own SKU and these unique codes are key to accurate inventory management and streamlined order fulfillment – so your business can grow and scale successfully.

In this guide, we’ll explain what a SKU is, why it matters, how to create and use SKU numbers effectively, and how smart SKU practices can optimize your UK and EU operations.

Jump to:

• What is a SKU Number?
• SKU vs UPC: What’s the Difference?
• Why SKUs Matter in Inventory Management
• How to Create a SKU: Step-by-Step Guide
• Managing SKUs in E-Commerce
• Common Mistakes to Avoid with SKUs
• Ensuring Optimized Inventory with Efficient SKU Management

What is a SKU Number?

SKU stands for Stock Keeping Unit, and it refers to a unique identifying code assigned to a specific product or item in your inventory. Each SKU is linked to key attributes, such as size, color, style and condition, and is used to distinguish one product from another, even if they appear quite similar.

Let’s say your beauty brand stocks a liquid foundation product which is available in three shades, two finishes and two sizes. Each unique combination of shade, finish, and size requires its own SKU; in this case, there are 12 possible SKU combinations.

SKU vs UPC: What’s the Difference?

It’s easy to confuse an SKU with a Universal Product Code (UPC), but they serve very different purposes:

• SKUs are assigned and recognized only by your business (i.e. the seller) to track inventory internally. Typically between 8 and 12 characters long, SKUs are customizable and optimized purely for your operations.
• UPCs are a standardized 12-digit identification number. These are created externally and used globally to identify specific items across supply chains and at a retailer’s point of sale (POS).

Here’s an example of how the codes differ:

A UPC might tell you a product is simply a ‘lavender-scented candle’, while a SKU tells you that it’s a ‘200g lavender soy candle in a frosted glass jar from your ‘Spring Calm’ collection, made by Vendor X’.

Why SKUs Matter in Inventory Management

Whether your stock is stored in-house, or warehoused with a 3PL partner, SKUs are an industry standard, used to track product movement from entry to sale. Robust SKU inventory management can offer serious operational advantages, especially for e-commerce businesses looking to scale and expand internationally.

The primary benefit of a SKU – thanks to its comprehensive, shorthand format – is to help identify and locate products more easily at any given time. This is important because every e-commerce or retail brand needs to know exactly how many items within a specific product range have been sold, remain in stock or need to be ordered.

The advantages of healthy SKU inventory management include:

1. Faster Stock Replenishment
Seeing immediately which products are running low means you can re-order and avoid stockouts. This is particularly important during peak trading periods, such as Black Friday and holiday sales.

2. Improved Order Fulfillment Accuracy
Brands can’t afford to send items in the wrong size or color to a customer. With each SKU representing a specific product variant, using them helps pick-and-pack teams avoid unnecessary, costly errors.

3. Better Sales Forecasting
Tracking SKU-level performance helps you see which items are selling more quickly or more slowly – and which are seasonal products. This makes demand planning much more accurate.

4. Easier Inventory Audits
Through efficient SKU inventory management, brands can track inventory levels more efficiently
and perform quick spot checks or full audits, ensuring your system aligns with what’s in stock.

5. Simplified Reverse Logistics
A clear SKU structure also makes it easier to process returns and restock items properly, as the item can be tracked from origin to destination – a must for US retailers offering returns outside of the US.

How to Create a SKU: Step-by-Step Guide

Although the SKU format you choose is largely up to you, there are several best practices to consider:

Step 1: Define Your Key Attributes

The first step is to make your SKU codes as descriptive as possible by identifying the characteristics that make your products distinctive. Consider product category, type, color, size, material or brand and present them in a hierarchical order, starting with category (eg. wellness, apparel, home goods).

 Step 2: Use Logical Abbreviations

If we go back to the liquid foundation make-up example, your beauty brand offers:

• 3 shades: Fair, Medium, Deep
• 2 finishes: Matte, Dewy
• 2 sizes: 30ml, 50ml

Here, an example SKU might be FD-MED-MAT-30

To break it down:

• FD = Foundation
• MED = Medium shade
• MAT = Matte finish
• 30 = 30ml size

So, FD-MED-MAT-30 tells you it’s a 30ml container of matte foundation in a medium shade.

Step 3: Keep It Short, Readable and Unique

While straightforward, the alphanumeric SKU number system carries some caveats. Some best practice tips are to:

• Use sequences of letters and numbers
• Avoid special characters (eg. @, &, #)
• Use dashes as separators
• Limit SKU length to between 8-12 characters if possible
• Avoid easily confused characters (0 and O or 1 and l)
• Ensure uniqueness to avoid duplicating a SKU across different products
• Keep your codes human-readable but machine-scannable

Step 4: Stay Consistent

The key to creating an easy-to-recognize SKU is to choose a naming convention and stick to it. This will ensure every team member – and your 3PL partner – understands the system.

If you need help naming your SKU numbers, look out for free, automated code generators available on certain e-commerce platforms and inventory management software.

Managing SKUs in E-Commerce

A clear, effective SKU inventory improves overall e-commerce operations, letting you track and manage product variants across multiple sales channels. This level of efficiency helps streamline operations, especially as your business grows:

Accurate Inventory Tracking
Having a unique identifier for each product variation simplifies order processing and allows for better analysis of product performance.

Products Organized for Speed and Accuracy
When your catalog is well-organized by SKU, you can quickly sort, search and filter products. This helps both your warehouse and your front-end website, offering real-time integration with your sales channels. This is especially useful if you’re working with a 3PL provider.

Streamlined Fulfillment
As soon as an order is placed, accurate SKU data ensures your warehouse picks the correct item – no unnecessary searching or second-guessing needed. This speeds up shipping and reduces the risk of unhappy customers.

Common Mistakes to Avoid with SKUs

Even experienced retailers can come up against certain obstacles when managing SKUs. Here’s what not to do:

• Overcomplicate SKU Structures
  Using ambiguous or special characters or overly detailed codes can confuse your team and slow down operations. Better to use numbers and letters only.
  
• Use Inconsistent Formatting
  Changing your SKU coding format halfway through your product line can lead to confusion, especially when integrating with 3PLs or software systems.
  
• Duplicate SKUs Across Different Products
  A ‘one-size-fits-all’ approach leads to fulfillment errors and inventory mismatches. Each SKU must be unique to every product variant to ensure accurate tracking and location visibility.
  
• Neglect SKU Updates
  Switching to a new product supplier or launching a new range means updating the SKU to reflect the changes. Failing to do so can muddle stock and lead to inaccurate inventory data.

Ensuring Optimized Inventory with Efficient SKU Management

For today’s e-commerce brands, having a well-structured SKU system improves everything from fulfillment to forecasting.

Partnering with an experienced third-party logistics (3PL) provider further simplifies SKU management, especially for US brands looking to enter the UK or EU market:

• System Integration: An expert 3PL will sync your e-commerce platform with their warehouse management system, allowing SKU-level visibility and control.
  
• Optimized Fulfillment: Their teams pick, pack and ship using your SKUs, ensuring accuracy and speed.
  
• Returns Management: They’ll use SKUs to sort and restock returned items quickly, maintaining accurate stock levels.
  
• Scalable Storage: As your SKU range grows, so does their ability to accommodate more inventory, without you needing to expand physical storage space in the UK or EU.

Whether you’re wondering how to create SKU numbers, scale your operations or make your logistics run smoother overseas, the expertise of a trusted  3PL provider can help you manage your SKU inventory with greater efficiency, especially during periods of high demand.

At ILG, we help international e-commerce brands bring clarity and control to their stock management. Our advanced systems and experienced teams work at SKU level to ensure your products move efficiently, accurately and reliably from warehouse to customer.

If you’re ready to scale your operations in the UK or EU with smart SKU management and expert 3PL support, get in touch today to find out how ILG can help create a streamlined logistics strategy for your business.