Definition
A SKU (Stock Keeping Unit) is a unique identifier assigned to each distinct product variant held in inventory. Every combination of product attributes that is stocked and tracked separately gets its own SKU — for example, a T-shirt in size Medium and color Blue has a different SKU from the same shirt in size Large or color Red. SKUs enable precise inventory tracking, sales reporting, and reorder management by individual product variant. SKU proliferation — managing too many low-velocity product variants — is one of the most common and expensive inventory management problems, consuming carrying cost, warehouse space, and purchasing bandwidth for products that barely move.
Why It Matters
SKU count directly determines inventory management complexity. Each additional SKU requires its own safety stock, reorder point, supplier relationship, and warehouse location. Many distributors have grown their SKU catalog through customer requests and new product additions without ever culling low-performers. Running a SKU rationalization exercise — identifying which SKUs generate less revenue than their carrying cost — typically reveals 15–30% of the catalog as candidates for elimination. Inventory Optimization Tool →
Frequently Asked Questions
What is a SKU in inventory management?
A SKU (Stock Keeping Unit) is a unique alphanumeric code assigned to each distinct product variant you stock. Every combination of attributes (size, color, packaging, configuration) that is inventoried separately has its own SKU. SKUs are the basic unit of inventory control, forecasting, and replenishment.
What is SKU rationalization?
SKU rationalization is the process of analyzing your product catalog to identify low-performing SKUs that cost more to carry than they generate in gross profit. Common criteria: SKUs with < $X annual revenue, < Y units sold in 12 months, or negative contribution margin after carrying cost. The goal is to cut catalog complexity and free working capital.
How many SKUs should a distributor carry?
There is no universal benchmark — it depends on your market and customer base. The principle is that SKU count should be set by customer demand, not supplier convenience or "we might need it." Any SKU where carrying cost exceeds expected annual gross margin should be scrutinized. Most distributors could profitably reduce their SKU count by 10–20%.