What Is An SKU
and what SKU’s have to do with inventory forecasting
The term SKU (Stock Keeping Unit) is associated with some product (usually, but not always, a physical one) and identifies the most detailed disaggregate description of the product. Let me give an example. Assume you produce shoes: they are your products. But you produce a specific shoe model, in a specific color, made with a specific material. This, again, is a product specification, somewhat aggregated. Within this product you might have several sizes available: an SKU might be a code to identify that specific size, or even something more disaggregated, like that size in a specific warehouse or retail point. An SKU usually corresponds to a detailed and specific product description. In other words: two product items with the same SKU identification can be exchanged with no problem.
An SKU (and its uniquely identified code) is extremely important for inventory management and control. If the inventory is like a building, SKU’s are the bricks.
Historical data is usually recorded at the SKU level; thus any good inventory forecasting software solution will be based on the analysis of past sales data at such level. Forecasting is usually done at the SKU level too. Sometimes, and the case of shoes is typical in this sense, some inventory forecasting software solutions aggregate different SKU’s and produce forecast at a higher level of aggregation. As an example, we might aggregate and forecast the inventory demand for that specific shoe type, disregarding the different sizes. This way of producing inventory forecasts has some advantages (it is usually more precise for the aggregate forecasted demand) but there are also disadvantages: sooner or later you will need to split your aggregate to the SKU level.
Whichever the demand forecasting technique and tool, eventually you will be interested in SKU’s. Not only for inventory demand forecasting, but also for the inventory and its control. You will need to replenish some SKU and leave others untouched as they are beyond the level which triggers a new order.
In summary: SKU are your products, described with all the details you need in order to keep inventory (and thus cost) under control.