SKU velocity and efficient warehouse slotting
SKU velocity refers to how frequently each SKU is picked over a certain period of time. It’s a supply chain KPI typically used to assess the stock distribution strategy in the different locations of a logistics facility.
This variable is essential for devising the warehouse slotting strategy ― i.e., location management ― which looks to maximise storage capacity while boosting operational efficiency.
What’s SKU velocity?
SKU velocity describes how often a SKU (stock keeping unit) is picked from its location. In other words, this formula calculates how fast inventory moves.
The process of optimising location management starts by determining the turnover speed of each SKU to see whether the products are sold quickly (“A” items), at an average speed (“B” items), or at a slow rate (“C” items) as per the ABC analysis. It’s important to analyze product turnover at different times of the year to establish the average speed as well as the velocity during peak demand periods. Likewise, you have to take into account not only seasonality but also possible offers or sales promotions made during the year.
How do you calculate SKU velocity?
To calculate SKU velocity, we need to know how frequently a product is dispatched. To compare the different SKUs, you have to first choose the same time interval for making this comparison.
For example, SKU 001 has sold 240 units in three months, and SKU 002 sells 816 units in one year. The weekly average tells us that SKU 001 has a SKU velocity of 20 units/week, while SKU 002 clocks in at 17 units/week. Therefore, SKU 001 has a faster turnover.
SKU velocity analysis and interpretation
SKU velocity is a key factor in SKU profiling. This process consists of identifying and understanding which types of products need to be stored in each area of the facility. It involves an optimal warehouse layout design as well as the appropriate choice of storage and transport systems, both manual and automated.
Each SKU is placed in a specific storage system or area in the facility according to its velocity, size, and the accessibility required, among other variables. Thus, it’s a good idea to store “A” item SKUs on racks that facilitate ergonomic picking and replenishment, e.g., live storage for picking. It’s also advisable to slot high-demand products close to dispatch zones to cut down on order picker movements and times.
Periodically analyzing SKU velocity — as well as other warehouse metrics such as days sales of inventory, minimum stock levels, and maximum stock level — contributes towards better distribution of the goods. And this optimises the logistics processes taking place in the facility.
Let’s take a look at how to perform this SKU analysis based on turnover:
1. Calculate the consumption value for each SKU:
SKU consumption value = number of units sold per SKU x cost per unit
| Item | Annual number of items sold | Cost per unit | Annual consumption value |
|---|---|---|---|
| SKU 001 | 40,000 | $5 | $200,000 |
| SKU 002 | 40,000 | $5 | $200,000 |
| SKU 003 | 5,000 | $5 | $25,000 |
| SKU 004 | 5,000 | $5 | $25,000 |
| SKU 005 | 5,000 | $5 | $25,000 |
| SKU 006 | 2,000 | $5 | $10,000 |
| SKU 007 | 1,000 | $5 | $5,000 |
| SKU 008 | 1,000 | $5 | $5,000 |
| SKU 009 | 500 | $5 | $2,500 |
| SKU 010 | 500 | $5 | $2,500 |
2. Calculate the consumption percentage for each SKU using the total annual consumption value.
| Item | Annual number of items sold | Cost per unit | Annual consumption value | Annual consumption % |
|---|---|---|---|---|
| SKU 001 | 40,000 | $5 | $200,000 | 40 % |
| SKU 002 | 40,000 | $5 | $200,000 | 40 % |
| SKU 003 | 5,000 | $5 | $25,000 | 5 % |
| SKU 004 | 5,000 | $5 | $25,000 | 5 % |
| SKU 005 | 5,000 | $5 | $25,000 | 5 % |
| SKU 006 | 2,000 | $5 | $10,000 | 2 % |
| SKU 007 | 1,000 | $5 | $5,000 | 1 % |
| SKU 008 | 1,000 | $5 | $5,000 | 1 % |
| SKU 009 | 500 | $5 | $2,500 | 0.5 % |
| SKU 010 | 500 | $5 | $2,500 | 0.5 % |
| 100,000 | $500,000 |
3. Order and classify the items according to the data obtained. The Pareto principle is generally used to place the products into the corresponding category. That is, “A” items — the ones with the highest turnover — account for 20% of a company’s inventory but 80% of its sales.
| Turnover | Item | Annual number of items sold) | Cost per unit | Annual consumption value | Consumption value % |
|---|---|---|---|---|---|
| A | SKU 001 | 40,000 | $5 | $200,000 | 40 % |
| A | SKU 002 | 40,000 | $5 | $200,000 | 40 % |
| B | SKU 003 | 5,000 | $5 | $25,000 | 5 % |
| B | SKU 004 | 5,000 | $5 | $25,000 | 5 % |
| B | SKU 005 | 5,000 | $5 | $25,000 | 5 % |
| C | SKU 006 | 2,000 | $5 | $10,000 | 2 % |
| C | SKU 007 | 1,000 | $5 | $5,000 | 1 % |
| C | SKU 008 | 1,000 | $5 | $5,000 | 1 % |
| C | SKU 009 | 500 | $5 | $2,500 | 0.5 % |
| C | SKU 010 | 500 | $5 | $2,500 | 0.5 % |
| 100,000 | $500,000 |
Thus, businesses must periodically analyze these data to distribute their products in locations based on their turnover: “A” items should be placed close to the loading docks — allowing operators to travel shorter distances — while low-turnover goods can be slotted in the upper levels.
Measuring SKU velocity
Calculating product turnover manually only gives the logistics manager a snapshot of the current turnover. It doesn’t include other variables such as possible spikes in demand or the seasonality of certain items. Moreover, the increasing number of varied SKUs in the warehouse makes calculating product turnover periodically even more complicated.
Against this backdrop, a warehouse management system (WMS) automates the calculation of SKU velocity, designing the optimal location strategy in line with the logistics attributes of each product: size, weight, groupage, etc. To do this, it’s crucial to correctly parameterise the warehouse software, properly configuring the layout, the exact position of the manual and automated storage systems, the workflows, and the flow of goods.
A software program such as Easy WMS, the WMS from Mecalux, adapts to the product location strategy determined according to the criteria and putaway rules pre-established by the warehouse manager. Therefore, this program optimises slotting in each storage zone in the facility. Unless expressly indicated by the logistics manager, the software will only move the stock between the locations of the designated area; it won’t perform movements of goods between different warehouse zones.
Easy WMS also features the advanced functionality Warehouse Slotting Software. This module allows regular analysis of SKU velocity to maximise location utilisation in the warehouse. In fact, the software assesses the expected benefits of placing each SKU in its optimal location. This calculation is obtained by adding the difference between the distances (current location and recommended location) to the normal daily pick speed, and then dividing the result by the usual number of order lines.
The program continuously suggests new slots for the stock, prioritising high-velocity SKUs at all times. Consequently, the module assigns an empty location that becomes a slotting buffer, that is, a space for temporarily storing goods until each SKU is placed in its new location.
SKU velocity: guaranteeing efficiency for your most valuable SKUs
Knowing the turnover speed of each SKU in the warehouse helps to ensure effective location management, adapting operations to the demand rate for each product.
Although there are different ways to calculate SKU velocity, the increasing number of diverse SKUs in the warehouse makes calculating SKU turnover periodically unfeasible. For this reason, software such as Easy WMS from Mecalux is the ideal tool for calculating this KPI and making decisions accordingly.
And with this in mind, Easy WMS’s advanced Warehouse Slotting Software module constantly suggests new slots for each SKU in relation to its velocity. Interested in digitising your processes to ensure effective stock control and optimise slotting management? Don’t hesitate to contact us. One of our experts will advise you on the best solution for managing your warehouse.