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Inventory management is one of the main challenges for any manufacturer and retailer. If you want to grow your business, you should know how to professionally organize your warehouse and track inventory. Creating an SKU number system, or stock keeping unit, is the first step to controlling your stock flow. It identifies each unique product and the quantity of a specific item, guiding you on when to refill your stock correctly. In this article, we’ll cover the most essential knowledge on SKUs: What SKU stands for, how to create SKU numbers, and how SKU differs from UPC.‍

What is an SKU number?

What is an SKU number

A stock keeping unit (SKU) is a set of letters and numbers that distinguishes a product type from others in your inventory. It’s an easy naming convention for any item. An SKU usually includes the most important abbreviated attributes, such as color, materials, supplier, model, packaging, etc. With a good SKUs system, employees can interpret the characters and know exactly what product it is.

SKU numbers are used for internal inventory management. There are no universal rules, so different sellers will have different SKUs for the same product depending on what attributes are important to them and how they want to develop the naming system.

Why are SKUs important to business?

SKUs speed up warehouse process

An SKU is the most efficient way to share product information that helps everyone to get on the same page and ensure orders are going out correctly. A well-defined SKUs system will simplify all activities in inventory management like tracking and counting goods, streamline checkout and improve profits by removing human errors, and provide you with valuable data to make purchasing decisions.

Here are the highlighted benefits of SKUs for your business:

Increase accuracy and speed in warehouse processes

SKU numbers divide your products into categories, so you can set up and arrange your warehouse better. You can easily find and track the exact product in your storage based on types, collection, or vendors. Therefore, it saves you a great amount of time tracking items with lots of minor steps.

In addition, a well-organized SKU number system can prevent lost sales in many situations by enabling you to:

  • Keep track and get data on your overstock for future orders
  • Follow the delivery status of your suppliers to avoid short shipments
  • Get a sales report and find out which items are best sellers to focus on

Enhance customer checkout experience

SKUs enhance customer experience

In a survey by Super Office, nearly 46% of businessmen shared that their top priority in the next 5 years is customer experience, while 86% of buyers will pay more for a better customer experience.

Therefore, you should seek ways to make your customers happy and keep them coming back. By establishing well-structured SKU codes, you can arrange your sales areas better to help customers easily navigate and find the right products in both online and offline stores. In addition, the SKU numbers system presents a seamless shopping experience to customers by making the checkout smooth and error-free.

You can invest in a Magento POS system that allows you to track your inventory and sales with SKUs, with real-time updates and all data in one place. For example, when customers check out, you will know instantly which products were sold, and your inventory level is automatically updated. Furthermore, if a customer can’t find an item, you can search its SKU in the POS system to check the stock status. If it’s available, you can locate the item quickly and close the sale.

SKU vs UPC: What’s the difference?


SKU number should not be mistaken for UPC code. UPC stands for universal product code, which is a standardized 12-digit number to identify a product. Each manufactured good is given a UPC, which is issued by the Global Standard Organization to the manufacturer of that good. All wholesalers and retailers purchasing that item must follow its UPC accordingly.

While both SKUs and UPCs give information when being scanned, UPCs only consist of numbers and cannot be interpreted by humans. Therefore, retailers prefer to establish their custom SKUs that make sense for internal tracking.

Below are the key differences between SKU and UPC numbers:


SKU Numbers

UPC Numbers


No limit.

12 digits.



Numeric only.


Generated by retailers to fits their inventory management.

Given by the Global Standard Organization (GS-1) to manufacturers.


Used internally for tracking products.

Used externally by retailers and distributors at the point of sale.


The same product is likely to have a different SKU for different sellers.

The same product has 1 unique UPC code regardless of the sellers.


Can be interpreted by humans.

Cannot be interpreted by humans.

How to create SKU numbers?

How to create SKU numbers

Creating SKU numbers enhances your inventory control efficiency and boosts sales by leveraging customer experience. Here’s how to generate SKU numbers for your company:

Step 1: Start with a top-level identifier

The beginning of each SKU should represent a top-level identifier in 2-3 characters. This is the most general classification that a product belongs to. Top-level identifiers can be a department, product category, or supplier. Based on the identifier, you can quickly locate any products in your store at a glance.

Step 2: Assign unique identifier in the middle numbers

Next, take the middle section of the SKUs to add unique features, such as size, color, subcategory to your item. Think about which product attributes are important to you and make sense when organizing your products.

Step 3: Complete the SKU with a sequential number

Use a sequential number to finish your SKU, like 001, 002, 003. It identifies older items versus newer items in your inventory and makes counting stock effortless. Therefore, no matter how many products you need to organize, the SKU lets you know which items have been in stock for longer and should be prioritized for promotion.

Step 4: Input the SKUs to your POS or inventory management system

Imagine you’re growing and having thousands of products, it’s not efficient to manage SKUs manually. Instead, a POS or an inventory management system will allow you to create and input all product data you want to track in a centralized database. The data can include product name, category, product description, price, SKU number, and any variations like sizes, colors, vendors. In addition, you can add the SKU to each product page, so you’ll know which products are generating the most sales and how many items you got left in your warehouse.

Step 5: Create SKU barcodes

After adding SKU codes to your inventory system, the system will automatically create a barcode for each item. A barcode is a scannable version of SKU and should be attached to the label of each product. Thus, whenever you scan a barcode for checkout, the system will update which item is just sold, which makes it easier to control your inventory.

SKU number example

SKU number example

Here’s an SKU number example for your reference:

A fashion boutique sells shirts, jackets, and trousers. They identify the most important variations to include in SKU are season, product type, model, color, and size. They establish the abbreviation for each criterion as follows, with a dash to separate each variation:






Spring 2021 (SP21), Summer 2021 (SM21), Fall 2021 (FL21), Winter 2021 (WT21)


Product type

Shirt (SH), Jacket (JK), Trouser (TS)


Product model

Model 01 (M01), Model 02 (M02), Model 03 (M03), etc. 



Blue (BL), Black (BK), Yellow (YL), Red (RD)



Small (S), Medium (M), Large (L)


Sequential number for each item

001, 002, 003, etc. based on the order that the products arrive in the warehouse

Therefore, the SKU format for your products can look like this:

  • Summer 2021, shirt, model 02, red, small = SM21-SH-M02-RD-S-001
  • Winter 2021, jacket, model 03, black, large = WT21-JK-M03-BK-L-012
  • Fall 2021, trouser, model 01, blue, medium = FL21-TS-M01-BL-M-020

That’s an example of an alphanumeric SKU number system with different variants. With this system, staff can determine the item of any product SKU number easily, and therefore you can operate your store more efficiently.

Tips to create an SKU number system

Tips to create an SKU number system

Keep in mind these best practices to make a well-structured SKU number systems:

  • Keep it simple: Although you can go as detailed as you want, it’s best to choose a few most important traits you want to include in the SKUs. Avoid super long SKUs since it’ll be hard to remember and interpret. The individual codes for each trait should be short and able to reflect the trait.
  • Begin with the most important variant: After you’ve selected your prioritized traits, decide which is the is most important to place at the beginning of your SKU codes. One suggestion is to start from the most general identifier and work down to the bottom, like our example above starting with the season.
  • Avoid starting SKU with a zero: This is because computers interpret a zero at the beginning as nothing. Therefore, it reads the SKU “01234XYZ” as “1234XYZ”. To prevent this error, don’t start your SKUs with a zero. Instead, choose a prominent trait that you can interpret in the alphabet.
  • Try to avoid letters that can be confused for numbers: If possible, limit using the letters that look like numbers to avoid confusion. For instance, the letter “O” can be mistaken for number zero, and the letter “I” may look like number one.
  • Don’t take the exact manufacturer numbers for your SKU: Different manufacturers have distinct ways to build their product codes. If you’re purchasing inventory from multiple manufacturers, following various SKUs systems will be overwhelming. Thus, you should develop your own SKU system for easier management, since customized SKU codes can better reflect the traits you want to track and meet the unique needs of your business.

To wrap up

SKU numbers allow you to easily organize, find, track, and identify products. The benefits of SKUs are tremendous, helping you better merchandise your store, arrange your warehouse, and serve your customers, which leads to improvement in revenue and profit. Therefore, you should create your own custom SKU numbers system as soon as possible that is fully tailored to your needs. With the support of Magestore POS and Magento inventory management system, your business will be equipped with the right software to develop and manage SKUs. Drop us a line and we’re happy to walk you through a demo.

Author Zita Hoang

More posts by Zita Hoang

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