A Detailed Guide To Stock Keeping Unit (SKU)

What Is a Stock Keeping Unit (SKU)?

A stock keeping unit, or SKU, is an internal code your company assigns to each distinct item it stocks or sells, so that no two different items ever share a code. The key word is distinct. One shirt design in three colors and four sizes is twelve different items as far as inventory is concerned, and each needs its own SKU, because the customer who wants a large in black will not accept a medium in white.

A code sounds like a small detail, yet every inventory process rests on it. Stock counts, reordering, sales analysis, pricing and margin reporting all assume each item is identified one way, clearly. When item coding is messy, with one product under three names or codes typed differently by each employee, count variances appear and nobody can say with confidence what is actually selling.

This guide explains how SKUs differ from barcodes and GS1 numbers, sets out practical rules for a coding scheme that scales, works through examples from several industries, and walks you through cleaning an existing item list before moving to ERP.

SKU vs Barcode vs GTIN vs Serial Number

These terms are often used as if they mean the same thing. They do not. They differ in purpose and in who issues them:

Put simply, a GTIN answers "what is this product, anywhere in the world?" A SKU answers "how do we identify this item inside our business?" A barcode is just a way to scan either number instead of typing it.

A note on the 628 prefix

GS1's prefix for Saudi Arabia is 628. It means the brand owner obtained its company number from GS1 Saudi Arabia. It does not tell you where the product was made. A product manufactured abroad for a Saudi-registered brand may carry 628, while one made in the Kingdom for a foreign brand may not. Do not build "local product" reports on the first three digits of a barcode.

Why you need SKUs when products already have GTINs

• Not every item has a GTIN: goods you make or repack yourself, or imported spare parts without global coding.
• You may sell the same product in several forms, such as a single unit and a six-pack, with different pricing and storage.
• An internal code means something to your team. A storekeeper can tell from the prefix that an item is a cleaning product before reading the name.
• Changing supplier can change the GTIN, while your internal code stays the same and keeps its sales history.

Anatomy of a Good SKU

A good SKU is short, readable and carries useful information in a fixed order. The most common structure has three parts:

1. Category prefix: two or three characters for the product family, such as ABY for abayas or FLT for filters.
2. Attribute codes: color, size, material or capacity, whatever distinguishes items within the category.
3. Sequence number: guarantees uniqueness within the category.

Examples by industry

• Abaya retailer: ABY-BLK-L-052 is an abaya, black, large, model 052.
• Auto parts: FLT-OIL-T-0147 is an oil filter for a given family of models, number 147.
• Food distributor: DTS-SKR-1KG-003 is Sukkari dates, 1 kg pack, number 3.
• Building materials: CEM-OPC-50-001 is ordinary Portland cement, 50 kg bag.

Coding in manufacturing

Factories hold more than finished goods: raw materials, packaging, semi-finished items that feed later stages, finished products and machine spares. Many add a leading layer for inventory type, for example RM for raw materials, PK for packaging, SF for semi-finished, FG for finished goods and SP for spares. Bills of materials become easier to read, stock reports split by type automatically, and inventory is presented under the right classification in the financial statements. A hypothetical plastics plant might code HDPE granules as RM-PE-HD-001, an unprinted bottle as SF-BTL-1L-014 and the printed, saleable bottle as FG-BTL-1L-014-A.

Practical Rules for Designing Your Scheme

1. Keep it reasonably short. Eight to twelve characters covers most businesses. Very long codes get mistyped and do not fit on shelf labels.
2. Start with a letter, not a digit. Spreadsheets often strip leading zeros, so 0147 becomes 147 and matching breaks.
3. Avoid look-alike characters. The letter O and zero, the letter I and one, cause errors in manual entry and counting.
4. Pick one separator, or none. Use a hyphen everywhere or nowhere, and stick to it.
5. Leave out anything that changes. Price, supplier name, bin location and purchase date belong in item fields, not in the code.
6. Never reuse a retired code. Reuse blends the history of an old product with a new, different one.
7. Document the dictionary. A table explaining every prefix and attribute code, owned by one person or team responsible for creating items.
8. Leave room to grow. A two-digit sequence caps a category at 99 items.

SKUs and Multiple Units of Measure

A frequent source of confusion: are a single can and a carton two SKUs? It depends on how you operate, but the general rule in ERP is one item code with several units of measure and conversion factors between them.

A hypothetical example

A distributor buys juice by the carton of 24 cans, sells cartons to grocery stores and single cans through its own outlet. If it sets up cartons and cans as separate items, someone has to post a manual conversion every time a carton is opened for single sales. That step gets forgotten, and the count shows a surplus of cans and a shortage of cartons. With one code and two units, the balance is held in the base unit, say 2,400 cans, displayed as 100 cartons when needed, and reduced correctly whichever unit is sold.

When does a pack deserve its own SKU? When it is genuinely a different product: a gift box that combines several items, or a pack with its own barcode sold at its own price in hypermarkets.

SKUs, Batches and Expiry Dates

In food, pharmaceuticals and cosmetics, the code alone is not enough. The same item may sit in the warehouse in three batches with different expiry dates, and the nearest expiry should ship first. The common mistake is creating a new SKU per batch, which bloats the item list and fragments sales history. The item keeps one code; batch and expiry are recorded on every receipt and issue.

Saudi pharmaceuticals show how the layers fit together. The SFDA's national drug traceability system relies on a GS1 DataMatrix code on each pack. Phase 1, in February 2015, covered the GTIN, batch number, expiry date and SFDA code; Phase 2, in March 2017, added a serial number. In food, the Food Law's implementing regulations require factories, warehouses and distribution centers to keep a traceability guide and traceability records for at least 180 days, which is hard to do without batches linked to items in your system.

What a Clean SKU System Gives You

1. Faster, more accurate counts

With one code and one barcode label per item, counting becomes scan-and-tally instead of name-matching, and errors from similar names drop. For the counting process itself, see our guide to stocktaking.

2. Reordering at the right level

Reorder points are set per SKU. If sizes share one code, stock can look healthy while your best-selling size ran out a week ago.

3. Real sales and margin analysis

You can see which color, size or pack size actually earns money and which item takes shelf space without moving. That is the starting point for ABC analysis.

4. Warehouse efficiency

A stable code per item means a fixed or traceable location, clear pick lists and fewer picking errors.

5. Channel integration

Online stores, marketplaces and POS all need a stable identifier to sync with inventory. A single SKU prevents selling an item the warehouse no longer has.

Common SKU Mistakes

• Using the supplier's code as yours. Change suppliers and the code changes, or two suppliers' codes collide.
• Letting anyone create items. Staff create new items rather than search for existing ones, and duplicates multiply.
• Memory-based codes. Entries like "Tea 1" and "Tea new" with no consistent logic.
• Embedding location. Move the item to another rack and the code becomes misleading.
• Not deactivating discontinued items. They linger in sales and purchase lists and confuse users.
• No naming standard. Descriptions need a rule too, such as category, brand, attribute, size.

Governing New Item Creation

The best scheme degrades within a year without rules for adding items. A simple fix is a new-item request form routed to one person or small team that owns item master data. It usually captures:

• Category and subcategory, which determine the prefix.
• Distinguishing attributes such as color, size or capacity.
• The standardized description.
• Base unit, purchase and sales units, and conversion factors.
• Any barcode and the manufacturer's GTIN.
• Whether the item is tracked by batch, serial number or expiry.
• Preferred supplier, expected cost and proposed selling price.
• The applicable VAT treatment.

Before approving, the owner searches for similar items to rule out a duplicate. Two minutes here saves hours of cleanup later.

Cleaning an Existing Item List Before ERP

Few companies start from zero. Most have an item list that grew for years in old software or spreadsheets. To clean it:

1. Export the full list with balances and the last movement date for each item.
2. Separate dormant items. Items with no movement in 12 months and zero stock are not migrated, or are migrated as inactive.
3. Find duplicates. Sort by name and barcode and merge items only after confirming they really are the same.
4. Approve the coding dictionary and issue new codes, keeping the old code in a reference field to ease searching during the transition.
5. Define units and conversions for every item.
6. Count physically before go-live and load opening balances from the count, not from the old system.
7. Print and apply new labels before go-live day.
8. Name a single owner for item creation after go-live.

A hypothetical cleanup result

A hypothetical spare parts company holds 9,000 items in its old system. Analysis shows 2,100 with no movement in over a year and zero stock, and 600 duplicates under different names. The active list drops to roughly 6,300 items, about 30% smaller: fewer labels, faster counts and cleaner search results for the sales team. Dead-stock reports also become trustworthy, because duplicates had shown one product as half moving and half idle.

Data Quality Indicators to Track

SKUs in an ERP System

A good system does more than store the code. It links it to everything around it: one or more barcodes, units of measure, cost, selling prices, reorder point, preferred supplier, bin location and, where needed, batch and expiry. In Tranquil, the inventory management module supports central inventory, multiple units of measure and pre-assemblies, and barcode integration is available in the manufacturing solution. To track items with two-dimensional codes, see our article on QR code inventory tracking.

Frequently Asked Questions

Is a SKU the same as a barcode?

No. A SKU is an internal code your company designs; a barcode is a way of representing a number so a scanner can read it. You can print your SKU as a barcode, and the same item may also carry the manufacturer's GTIN barcode.

Do I need GS1 membership to create SKUs?

No. SKUs are internal and need no registration. If you manufacture a product and want to sell it through retailers that require a global barcode, you need GTINs from GS1.

How long should a SKU be?

Usually eight to twelve characters. More important than length is a consistent, documented logic and a sequence segment large enough for growth.

Should every size and color get its own SKU?

Yes, if they are sold and stocked as different items. Different packs of the same item, such as a unit and a carton, are usually handled as units of measure on one code.

Should each production batch get a new SKU?

No. Batch and expiry are recorded on each movement of the same item. A SKU per batch bloats the item list, fragments sales analysis and makes reorder points meaningless.

What should I do with discontinued items?

Deactivate them rather than delete them, so their history stays in reports, and never reuse the code. You can contact the Tranquil team to review your item structure before migrating.