How SKU Count Affects Order Fulfillment

In Should You Open More Distribution Centers, we looked at strategies to reduce shipping costs and delivery times for ecommerce businesses, including SKU count and how it affects your order fulfillment.

Does matching the needs of your customers outweigh the time and cost associated with a high SKU volume?

What Is a SKU?

A Stock Keeping Unit (SKU) is a scannable bar code between 8-12 alphanumeric characters assigned to a product to identify specific information about it, such as color, size and style. It also allows vendors to track inventory movement.

SKUs present information in order of most important to least important. For an apparel retailer, a SKU number might start with a top level identifier, such as “active wear,” followed by subcategories like “shorts,” “blue” and “small.” A SKU’s architecture will usually depend on stock size. The larger the stock size, the more complex SKU numbers have to be.

Unlike Universal Product Code (UPCs), SKUs are unique to every business. They help retailers track which products are most in-demand and which ones aren’t selling as well.

SKU Count and Order Fulfillment

While a high amount of SKUs is essential to most businesses, it also comes with higher fulfillment costs. That’s because large SKU counts take up more time–and space–in the fulfillment process.

More SKUs, More Time

Entering SKUs into a warehouse management system (WMS), for example, is time consuming—whether you have your own distribution centers or are using a third-partly logistics provider. And the larger the number of SKUs you have, the higher the chance of mispicks.

This risk is even higher if you’re using paper-based picking instead of a WMS. This means more time is wasted correcting orders. A larger SKU counts also means orders take more time to pick, pack and ship. This delay in order fulfilment can potentially lead to unsatisfied customers.

High SKU Volume, High Costs

High SKU volume also means an increased need for warehouse space. This is especially true if your bulk storage is separate from your picking space. And bigger warehouses mean more overhead costs.

The 80/20 Rule

Having a good SKU system in place allows you to identify popular products as well as individual variants, such as size or color, so you can determine which items to invest in and which to consider discontinuing.

A good rule of thumb is the 80/20 rule, also known as the Pareto principle, which in the fulfillment industry implies 80 percent of your sales are likely generated by about 20 percent of your SKUs.

How do you apply the 80/20 rule to your order fulfillment? Prioritize the top products that bring in the majority of your profits. Those SKUs should be located in an easy to reach area and be monitored effectively. This strategy, along with well-timed SKU replenishment, will help save you time and money and can greatly improve fulfillment efficiencies.

Keep in mind the time and costs associated with high SKU volume can be offset if your order volume is high enough: the greater your order volume, the greater your savings on shipping.