SKU stands for Stock Keeping Unit. It is an internal code you create and assign to each distinct product in your inventory: not just each product, but each variation of each product. A t-shirt in three colors and four sizes is twelve SKUs, not one. A coffee blend sold in twelve-ounce, sixteen-ounce, and five-pound bags is three SKUs. The purpose of the SKU is to give your inventory system, your fulfillment team, and your reporting a single unambiguous identifier for each thing you sell so there is no confusion between similar items.
A good SKU structure encodes meaningful information in a readable format. A common convention is to use two to four character codes for the product category, the product name abbreviation, and the variant attributes, separated by hyphens. A blue medium men's polo shirt might be SKU POLO-M-BLU-MED. A vanilla twelve-ounce coffee blend might be SKU COFF-VAN-12. The structure should be consistent across your entire catalog so that anyone reading a SKU can understand what product and variant it refers to without looking it up.
Choose a structure and document it before you create your first SKU, then follow it without exception. The most common inventory management problem in growing product businesses is a SKU structure that was applied inconsistently: some products coded one way, others coded differently when a different person entered them, and some with no structure at all. Retroactively standardizing a large catalog is a significant project. Starting with a documented standard and enforcing it from the first product avoids that project entirely.
Keep SKUs short. SKUs longer than twelve to fifteen characters become error-prone to enter manually and harder to search in inventory systems. If your structure is producing long codes, simplify the abbreviations or reduce the number of attributes encoded in the SKU itself. Some attributes are better tracked as separate fields in your inventory system rather than embedded in the SKU code.
External identifiers like UPCs (Universal Product Codes) for retail distribution are separate from your internal SKUs. Your SKU is your code for your internal use. A UPC is an industry-standard barcode required by retail buyers and most major marketplaces. Both can exist simultaneously for the same product, and your inventory system should store both. If you plan to sell through retail channels or Amazon, purchase UPCs through GS1, the official issuing authority. Third-party UPC resellers are cheaper but may not be accepted by all buyers.
A well-structured SKU system is invisible infrastructure when it works correctly and a source of ongoing operational friction when it does not, which makes getting it right at the start one of the highest-return decisions a product business can make in year one.