Mastering Your Inventory: The Deep Dive into SKU Meaning in Warehouse & Its Impact on Rack Design

The term SKU (Stock Keeping Unit) is undoubtedly a common and crucial term in warehouse management, especially in today’s modern warehousing operations. Its role extends beyond simple inventory identification; it’s also key to boosting warehouse operational efficiency, optimizing space utilization, and guiding infrastructure development.

As professional warehouse racking manufacturers, let’s dive deeper into the world of SKUs together!

What is an SKU?

SKU, short for Stock Keeping Unit, is an internal alphanumeric code created by a merchant or company to uniquely identify each specific, distinct product.

Simply put, an SKU is like an “ID number” used internally by businesses to manage and track inventory. If products differ in any attribute – such as color, size, packaging, model, or version – they should have different SKUs.

Examples:

• “Red S-size Cotton T-shirt” → SKU-001RED-S
• “Blue M-size Cotton T-shirt” → SKU-001BLU-M
• “Red S-size Cotton T-shirt (2025 Model)” → SKU-001RED-S-25

As you can see, SKUs typically incorporate some product characteristic information, making it easy for management personnel to quickly identify what the product is.

SKU vs. UPC/EAN: What are the Benefits of SKUs?

Now, let’s talk about the differences between SKUs and UPC/EANs, and the advantages of SKUs.

First, let’s understand UPC and EAN:

• UPC (Universal Product Code): Primarily used in North America.
• EAN (European Article Number): More widely used globally, and now often referred to as part of GTIN (Global Trade Item Number).

UPC and EAN are essentially types of barcodes. They are internationally standardized codes, usually assigned and managed by a global organization (GS1). Their main purpose is for retail, facilitating the global circulation and sale of goods, enabling quick scanning and identification.

Key Benefits of SKUs:

Compared to UPC/EAN, the advantages of SKUs mainly lie in their internal management and flexibility:

• Highly Customizable and Flexible:
  • UPC/EANs are fixed, globally uniform codes that you cannot modify, nor do they contain any descriptive information about the product itself.
  • SKUs are created by the company itself. You can incorporate various product characteristics into the SKU based on your needs and management habits (e.g., brand abbreviation, color code, size code, production year, supplier code, etc.). This makes the SKU “speak for itself,” allowing warehouse or sales staff to instantly identify specific product attributes, significantly boosting work efficiency.
• Granular Inventory Management:
  • UPC/EAN typically identifies products only at the “product level,” such as “Nike Red Sports Shoes.”
  • SKUs can identify down to the “smallest sellable unit,” for example, “Nike Red S-size Sports Shoes” or “Nike Red M-size Sports Shoes.” This allows businesses to manage inventory more precisely for each specific size and color, preventing overstocking of certain styles while others run out.
• Improved Internal Operational Efficiency:
  • Faster Picking and Packing: Warehouse personnel can quickly locate the corresponding product based on the information on the SKU, reducing the likelihood of picking errors.
  • Accurate Inventory Counts: Detailed SKUs make inventory counts more precise, helping to identify discrepancies promptly.
  • Optimized Replenishment and Procurement: By analyzing sales data for different SKUs, businesses can more accurately forecast market demand, timely replenish hot-selling items, and reduce inventory of slow-moving items, thereby lowering inventory costs.
• Supports Internal Reporting and Analysis:
  • With detailed SKU data, businesses can easily generate various internal sales reports, inventory turnover rate reports, profitability analyses, and more. For instance, you can easily see which colors or sizes of products sell best, allowing you to adjust future production and purchasing plans.
• Adapts to Business Changes:
  • When your product range increases, or you need to differentiate between different batches or suppliers, you can flexibly create new SKUs to meet management needs without waiting for an international organization to assign new codes.

How Do SKUs “Tell” You Which Racking to Choose?

To understand this, we need to view SKUs as a collection of product characteristics. A well-designed SKU typically contains the following types of information (or has these details recorded in its corresponding database):

• Product Size and Shape:
  • Information hidden behind the SKU: Is this a large item or a small item? Is it regular-shaped or irregularly shaped? Does it need to be laid flat, or can it be stacked?
  • Impact on racking selection:
    • Small, lightweight, high-turnover SKUs: Suitable for light-duty shelving, carton flow rack, or even storage in bins and containers, facilitating manual picking or automated equipment retrieval.
    • Large, heavy, low-turnover SKUs: Best suited for heavy-duty pallet rack, requiring forklifts or other equipment for storage and retrieval.
    • Long, slender items (e.g., pipes, lumber): May require a cantilever rack.
    • Irregularly shaped items or those requiring special protection: May need customized racking or dedicated storage areas.
• Product Weight:
  • Information hidden behind the SKU: What is the single item weight or packaged weight of this SKU?
  • Impact on racking selection: The load-bearing capacity of the racking is a critical factor in selection. Light-duty shelving has limited capacity, while heavy-duty pallet racking can support tons of weight. Choosing mismatched racking can lead to safety hazards.
• Product Turnover Rate/Velocity (SKU Velocity):
  • Information hidden behind the SKU: Is this SKU a fast-moving item (Class A), medium-volume (Class B), or a slow-moving/special item (Class C)? This is determined by analyzing the SKU’s sales data.
  • Impact on racking selection:
    • High-turnover SKUs (Class A): Should be placed in the most accessible locations, such as the front of the picking area, carton flow rack, or the rapid access zone of an Automated Storage and Retrieval System (AS/RS). The goal is to maximize picking efficiency and reduce travel distance.
    • Medium-turnover SKUs (Class B): Can be placed in locations slightly further from the picking area but still relatively convenient, such as the middle levels of standard selective pallet rack.
    • Low-turnover SKUs (Class C): Can be placed in more remote areas of the warehouse, higher levels, or denser racking systems (like drive-in rack, pallet shuttle rack), to maximize storage space utilization. These items are not accessed often, so some access speed can be sacrificed for space.
• Storage Volume/Inventory Quantity:
  • Information hidden behind the SKU: How much inventory of this SKU is typically held? Is it small quantities in many batches, or large quantities in few batches?
  • Impact on racking selection:
    • Small quantities but many SKU types: May be suitable for dense storage racking (e.g., multi-level shelving) to increase storage density.
    • Large quantities and large single-SKU volume: Requires high-bay heavy-duty racking or stacking racks to fully utilize vertical space.
• Temperature/Humidity Requirements / Special Storage Conditions:
  • Information hidden behind the SKU: Is this SKU fragile? Does it need refrigeration, moisture protection, or dust protection?
  • Impact on racking selection: Determines whether special racking (e.g., cold storage racking), enclosed shelving, dust covers, or even shock-absorbing features are required.

How Do SKUs Optimize Warehouse Layout and Space Utilization?

SKUs primarily optimize warehouse layout and space utilization in the following ways:

Based on SKU Attributes: “Slotting Optimization”

This is the most direct application of SKUs in optimizing space utilization. By analyzing each SKU’s characteristics, we can find its most suitable “home”:

• Size and Shape:
  • Optimization: Large, bulky, or irregularly shaped SKUs require specific wide storage spaces or special racking. Small, standardized SKUs can utilize small compartments, bins, or even automated storage systems, significantly increasing storage density. Understanding SKU dimensions helps us select the most appropriate racking units and slot sizes, avoiding wasted space (e.g., using a large slot for a small item).
  • Effect: Ensures each SKU is “just right” in its placement, minimizing gaps and maximizing the warehouse’s storage capacity.
• Weight:
  • Optimization: Heavy SKUs need to be placed on the lower levels of heavy-duty racking or on the floor, while lighter SKUs can be placed on higher levels or light-duty shelving.
  • Effect: Ensures warehouse structural safety and allocates loads appropriately based on weight, avoiding unnecessary space occupation or safety hazards.

Based on SKU Turnover Rate: “ABC Classification” and Zone Division

This is one of the most common optimization strategies. An SKU’s turnover rate (sales velocity) is one of its most important attributes, directly influencing its optimal location in the warehouse.

• ABC Classification:
  • Class A SKUs (High Turnover): High sales volume, fast-moving SKUs.
  • Class B SKUs (Medium Turnover): Medium sales volume, relatively stable SKUs.
  • Class C SKUs (Low Turnover): Low sales volume, slow-moving, or even obsolete SKUs.
• Optimization:
  • Class A SKUs: Placed in the most accessible areas of the picking zone, closest to the outbound dock, and in high-traffic areas, such as carton flow rack or low-level shelving, or even through cross-docking to reduce storage time. This significantly shortens picker travel distance and picking time.
  • Class B SKUs: Placed near Class A areas or in easily replenishable zones.
  • Class C SKUs: Placed in remote areas of the warehouse, on high-level racking, or in dense storage areas (like drive-in rack, pallet shuttle rack). These areas might have slightly lower access efficiency but maximize space utilization.
• Effect:
  • Increased Picking Efficiency: Reduces unproductive walking and searching time, improving overall operational efficiency.
  • Optimized Flow: Plans smoother picking paths, reducing congestion.
  • Improved Space Utilization: Dedicates high-value, fast-flowing space to high-turnover SKUs, while “compressing” low-turnover SKUs into lower-cost storage areas.

SKU Correlation Analysis and Co-Location Strategy

By analyzing SKU sales data, we can discover which SKUs are frequently ordered together (e.g., a mobile phone and a phone case).

• Optimization: Place SKUs that are frequently picked together in adjacent locations or within the same picking area.
• Effect: Further reduces picker travel distance and time, improving overall order picking efficiency, and can also optimize the utilization of some storage equipment (e.g., placing multiple related SKUs in one bin).

Impact of SKU Quantity and Diversity on Layout

The number and diversity of SKUs directly determine the type of storage system and layout you need.

• Few SKUs, large batch storage: Suitable for high-density storage systems like drive-in rack or pallet shuttle rack to maximize space utilization and reduce the number of aisles.
• Many SKUs, small batch storage: Requires a greater variety of racking types (e.g., shelving, carton flow rack, pallet rack combined), and emphasizes picking efficiency. May require wider aisles to accommodate diverse picking operations.
• Optimization: Warehouse layout adjusts based on the overall characteristics of SKUs, including aisle width, racking height, and the division and relative positions of operational areas (receiving, storage, picking, packing, shipping).
• Effect: Ensures the warehouse layout effectively supports current and potentially increased SKU quantities and types in the future, avoiding wasted space or operational bottlenecks due to SKU changes.

Identification and Management of Dead Stock and Slow-Moving SKUs

SKU data helps us identify “dead stock” (long-term slow-moving inventory) or SKUs with extremely low turnover rates.

• Optimization: Remove these SKUs from high-value storage areas, or consider promotional sales, clearance, or even disposal.
• Effect: Frees up valuable storage space, reduces inventory holding costs, and makes way for more valuable and profitable SKUs.

Strategies for Building an Efficient SKU System

To build an efficient SKU system, we need to approach it from several angles: encoding rules, implementation processes, system support, and continuous optimization.

1. Formulate Clear, Meaningful SKU Encoding Rules

This is the core of the SKU system. A good SKU code should possess the following characteristics:

• Uniqueness: Ensures every SKU code is one-of-a-kind, with no duplicates.
• Conciseness: As short as possible for easy input and memorization, reducing error rates.
• Readability/Understandability: Ideally, the code should directly indicate some key product attributes for easy manual identification.
• Scalability: Reserves encoding space for future new products or attributes, avoiding frequent rule modifications.
• Consistency: Ensures all new and old products follow unified encoding rules.

Strategies:

• Attribute Combination Method: This is the most common and recommended method. Extract key product attributes (e.g., brand, model, color, size, material, supplier, year/batch, etc.) and represent them with simplified codes, then combine them.
  • Examples:
    • Apparel: Brand Abbreviation-Model Code-Color Code-Size Code-Year
      • NIKE-TSHIRT01-RED-M-24 (Nike T-shirt, Model 01, Red, M size, 2024 model)
    • Electronics: Brand Abbreviation-Product Category-Model-Color-Version
      • SAMS-PHN-GALAXY256-BLK-CN (Samsung Phone, Galaxy series, 256GB, Black, China version)
  • Benefits: High information content, easy to identify and classify, convenient for data analysis.
• Pure Numeric Sequential Encoding (Not recommended as primary code): Simple and straightforward, just sequential numbers starting from 001, 002.
  • Pros: Simple, less prone to errors.
  • Cons: Lacks readability; you can’t tell product information from the SKU itself, relying solely on an external database. Typically used as a supplementary code or internal system serial number.
  • Suggestion: You can add a short sequential code as a suffix after an attribute-combination SKU to enhance uniqueness.
• Avoid confusing characters: For example, the letter “O” and the number “0,” the letter “I” and the number “1.” Avoid special symbols.

2. Implementation and Execution Process

Once rules are in place, a comprehensive implementation process is needed to ensure their effective adoption.

Strategies:

• Assign Responsibilities: Who is responsible for SKU creation, review, and maintenance? This is usually a collaborative effort involving product management, procurement, or warehouse departments.
• Establish SKU Creation Process:
  • New Product Introduction: When new products arrive, SKUs must first be created according to established rules.
  • Attribute Collection: Collect all key attribute information for new products in detail.
  • Code Generation: Generate SKU codes automatically or manually based on the rules.
  • Review and Confirmation: Review generated SKUs to ensure uniqueness and accuracy.
  • System Entry: Enter the SKU and its corresponding product information into all relevant systems (e.g., ERP, WMS, sales system).
• Training: Train all personnel involved in SKU creation, use, and management to ensure they understand the rules and can operate correctly.
• Enforcement: Stipulate that all inbound, outbound, and sales processes must use SKUs for identification and operations.

3. Robust System Support

Manually maintaining an SKU system is inefficient and error-prone; reliance on information systems is essential.

Strategies:

• Master Data Management (MDM): Establish a centralized product master data system to uniformly store all SKUs and their detailed attribute information. This ensures data consistency and accuracy, avoiding “information silos.”
• Enterprise Resource Planning (ERP) System: Integrate SKUs into the ERP system, linking them with procurement, sales, finance, and other modules to achieve end-to-end management from order to shipment.
• Warehouse Management System (WMS): WMS is crucial for SKUs to function effectively in the warehouse. It utilizes SKUs for:
  • Location Management: Intelligently allocates storage locations based on SKU characteristics (size, turnover rate).
  • Inbound/Outbound Management: Scans SKUs for accurate receiving and shipping.
  • Picking Path Optimization: Optimizes picking paths based on SKU locations.
  • Inventory Counting: Quickly and accurately identifies and counts inventory.
• Barcode/RFID Application: Generate corresponding barcodes (or RFID tags) for each SKU and affix them to products or minimum packaging. In warehouse operations (e.g., receiving, putaway, picking, checking, shipping), scanning SKU barcodes significantly improves efficiency and accuracy.

4. Continuous Optimization and Maintenance

An SKU system is not a one-time setup; it requires regular review and optimization.

Strategies:

• Regular Review of SKU Rules: As business evolves, product categories may expand, and existing SKU rules might become inadequate. Periodically evaluate and adjust rules to ensure their forward-looking nature.
• Data Cleansing and Standardization: Regularly check the system for invalid, duplicate, or erroneous SKU data, and perform cleansing and standardization.
• Performance Evaluation: Monitor the efficiency gains brought by the SKU system (e.g., picking efficiency, inventory accuracy, shipping error rate), and optimize based on data.
• Handling Obsolete SKUs: For discontinued or no-longer-sold products, clearly define the handling method for their SKUs (e.g., mark as inactive but retain historical data).
• Training and Updates: Continuously train employees on SKU knowledge and new processes.

Conclusion

After reading this article, I believe you’ll have new insights into the importance of SKUs in modern warehouse management! The more you understand them, the better you can utilize SKUs for racking selection, warehouse layout optimization, and improving overall operational efficiency.

As warehouse racking manufacturers, we can not only provide you with racking and warehouse space design planning, but also offer professional solutions for the warehouse application of SKUs.

So, if you’re currently struggling with how to plan racking and management systems for your warehouse, feel free to contact us!