SKU or Stock Keeping Unit is a base code for tracking goods or products across various functions or departments inside or outside the company. Based on the unique identification number, businesses follow the movements of specific products or product categories to better understand their performance and profitability. When companies deal with a great number of different products, SKUs allow them to make a distinct difference between them to minimize errors or duplicate data.
From a production point of view, each finished product gets an assigned SKU entered into the system with descriptions. This code is used to move goods in the system from production to warehouse and later on to sales and distribution. From a sales point of view, SKUs are used to differentiate assortments and assign specific codes according to different product attributes. It is used in sales efforts, marketing, catalogs, and inventory management.
Often, when dealing with a bigger assortment, it’s hard to specify which products are more cost-effective and necessary to keep in supply. That requires daily analyses across multiple databases with filtering out the only necessary information. SKUs allow for analysis across individual products, brands, or product categories, depending on each department’s needs and requirements.
For each department, there is a different way of interpreting SKU’s performance. Certain metrics require certain data sets, while others require different ones. There are vast methods of utilizing SKU data and they all depend on set goals.
What does SKU do
If we track SKU from production, data that accompanies it can be information about logistics (size, packing, other product characteristics, and attributes), cost, BOM (bill of materials), production cycle length, and quality control. In warehouse management, SKUs have data on pallets, packing size, quantity, inventory, warehouse pallet address, usage or expiration data (if it’s perishable products), and time of warehouse entry or exit. In sales, data that is tracked is sales numbers, price, quantity, date, customer, location, and cost of sales efforts. For marketing, SKUs are recorded through sales numbers, marketing cost, and marketing and trade marketing data (information about product characteristics, brand, country of origin, etc.).
Each piece of information is directly linked to the SKU. Often the information about SKUs is kept in Master Data Management software, specifically in the Product Information Management part of the software to track static data. Dynamic data can be tracked also through MDM or ERP systems.
With so much data that goes along with SKUs, its importance can, unfortunately, be disregarded or even not fully utilized. Some metrics and insights can be drawn from it to explain business operations and spot errors or opportunities.
One of the most important data is sales numbers that explain the effectiveness and profitability of each SKU or product. They are calculated based on orders and goods delivered, or from revenue. Price and sold quantity are a basis for revenue or earnings calculation and can explain the demand for some products. If compared to dates, they can show trends across different time periods.
SKU sales analysis
To start, let’s delve into the wholesale or retail part of SKU analysis. It’s a specially interesting part of the SKU movement that is directly related to the supply chain. Here, SKU movements are directly linked to sales and inventory management. Data extracted there is price, sold quantity, location, product category, and date. With that information, you can do a full analysis of the assortment and its profitability while interpreting with consideration of geographical and time factors.
From sold quantities and prices, one can determine the sales for that time period. If connected to specific dates, it can point out outliers and alert users that some SKUs are showing unordinary over or underperformance when compared to previous time periods. When you look at one SKU you can analyze sales trends movement over time and compare it to other SKUs or product categories in the same or different locations.
This approach helps determine which products should be kept in stock and pushed more in sales. If according to trends, can sellers expect an increase in demand, they automatically know when to increase stock to satisfy the needs of customers. It’s also a major part of demand planning. Demand planning is based on the number of sold units over time. With historical data in place, it can forecast future trends in demand for certain SKU or product categories. When analyzing SKU performance through time, it can be determined if the product is new on the market so a phase-in is needed, or if it’s in the last stage of the product life cycle and should be, therefore, put in the phase-out process. With demand planning, inventory management could be more optimized and cost-effective.
The same principle can be applied to determine products in the assortment that are below the category performing line or generally have low sales. It could be an indicator to retract the product from stores or to intensify marketing and sales strategies. If there are low sales of the complete category, it could be an incentive to pull it off the shelves completely to lower costs and avoid overstocking.
SKU analysis could also be used in price management and optimization. When comparing SKU prices to other SKUs or category averages, sometimes there is room for price increase without losing out on sales. But the main part is analyzing if the number of sold units is closely correlated to the price change or not. This helps determine if consumers are price-sensitive when talking about that product or product category.
From a market share perspective, SKU analysis is beneficial when trying to determine which products or product categories make up the most share in sales. Certain locations are going to buy more of some SKUs while others are going to do the same for some other products. This is a signal for sellers to plan their store assortment and keep more goods that are higher in demand while reducing the stock for those with low or zero demand.
Why focus on products
When talking about products and SKUs, especially when there are hundreds or thousands of them, you can’t single-handedly take charge of them all. Going through each and comparing it to others is a heavy task when you have to do it daily. Through specific software solutions, all that data can be drawn into one dashboard and explained through visualizations and easy filtering options.
What matters the most with SKUs is to understand their performance and not ignore all the signals and metrics just because your assortment needs diversity. The strength isn’t always in numbers and not every product has its customer. Going big on assortment doesn’t qualify for success. It’s different in retail, yes, but even there, assortment should be planned according to location, store size, and customer segments. Otherwise, overstocking and stocking of slow-moving goods increases costs and lowers store and warehouse management efficiency. SKU analysis is integral for strategic decision-making that can offer long-term stability and more information-based planning.
