What is the difference between a SKU and a stock code?

When considering the difference between a SKU and a Stock Code, the golden rule is that a SKU can have an array of stock codes associated with it, but a Stock Code can never be associated with more than one SKU.

Firstly, let’s start by explaining what a SKU is: SKU stands for Stock Keeping Unit. This means identical units of inventory that you want to keep together in a single location (think: single compartment, inside a drawer, inside your safe).

Now let’s define what a Stock Code is: a unique identifier for a single unit of inventory. It is critical for both traditional retail practices such as single-piece accounting methods, as well as modern retail robotic picking systems in highly automated warehouses. Neither process can function without a Stock Code.

Unfortunately, especially in smaller businesses, these two terms are often confused with each other, resulting in operational inefficiencies.

The diagram below shows what SKUs and Stock Codes for the same ring can look like for a retailer carrying 2 colors, three metal titles, and more than one finger size per metal title, with inventory per SKU between 2-4 units:

This prevailing SKU logic is built into all modern Point of Sale (PoS) and ecommerce solutions and it empowers efficient sales reporting, inventory accounting, and memo reconciliation. From Walmart to Tiffany & Co., every major retailer and brand views sales through the lens of SKUs.

Why don’t independent retailers use SKUs for the purpose they were designed?

Independent retailers need to manage inventory carefully in order to protect cash flow. Accurate records of inventory intake cost and current value of inventory define a small businesses’ primary asset on the balance sheet: inventory.

For the majority of SKUs, independent retailers generally require a single unit of inventory in stock at any given moment in time. As a result, they often order single units of products at a time. This puts small businesses in a position to track exact cost, exact sell price, and exact days-to-sell for any given inventory item.  With more inventory in their inventory allocation systems, larger retailers do not have this luxury, and utilize accounting methods like WAC, FIFO or LIFO to approximate important SKU-level metrics such as gross margin and days-to-sell.

Given this tendency to only have one unit of inventory at a time for any given product, small retailers have frequently utilized SKU codes as the unique identifier for their inventory. Using SKU codes in this way disables retailers from implementing best practices that can improve their inventory efficiency and business intelligence capabilities for the following reasons:

• Sales tracking and reporting of best performing styles is compromised. When a second identical inventory unit arrives at the retailer, a new SKU code is assigned, resulting in a  loss of visibility that the product has sold a second time.
• To work around this, retailers rely on vendor style numbers as a unique identifier. This creates additional problems because the retailer cannot guarantee that the vendor style references are unique. 
• Different vendors could easily use the same code - B123 for a bracelet, for example - causing, at best, errors in sales reporting that will be very difficult for the retailer to detect, and, at worst, distorted sales reports that lead the retailer to incorrect conclusions and purchasing decisions.

Using stock codes to manage inventory and SKU codes to manage unique products in an assortment resolves the root cause of the problem. Retailers will maintain existing practices in terms of managing costs and selling prices at the individual inventory unit level, while gaining significant capabilities in terms of product performance intelligence.

What are the pitfalls of not using SKUs in the way they are designed?

The true problem emerges when retailers wish to adopt modern technology solutions that have been designed to integrate seamlessly with other technology solutions. Misappropriation of the SKU logic will entirely break or block systems from speaking the same language. For example, Shopify adheres to industry-standard SKU norms, and so if you are using different SKUs for the same item of inventory in your PoS, it is never going to be possible to sync inventory between your PoS and Shopify (or any other modern web platform).

Ideally, retailers should use stock codes to track inventory-specific data, such as cost and days to sell, and SKU codes to group identical inventory and enable product performance analysis.

If retailers do not use SKU codes as unique inventory units, how can they keep track of inventory?

Stock Code and Inventory ID are common terminologies used to describe the unique identifier for specific units of inventory.

Systems that cater to both SKUs and stock codes provide retailers with the best of both worlds: unique inventory IDs and tracking (such as intake cost, current inventory value, exact days to sell), as well as critical SKU-level data (average gross margin, average days to sell, inventory turn, exposure, etc) that retailers need to evaluate performance.

While a SKU will tell you how much to sell a product for, only a stock code enables you to track exactly what was paid for that item of inventory, or where that item is physically located at any given moment in time.

So as we can see, a small adjustment to how you think about your sales and inventory can pay big dividends for your business.