Gathering and monitoring data on SKU velocity has always been critical to implementing the right warehouse processes and technologies. What has changed over the years is more of a focus on efficient forecasting. That is the result of product proliferation and increasing retail competition.

One thing that hasn’t changed, however, is the need to manage product flow accurately and quickly.

“SKU velocity is simply the speed at which certain items move in and out of storage,” says Jeff Karrenbauer, president, INSIGHT, Inc., an international provider of supply chain planning solutions. “Most distributors separate items as fast, medium, or slow movers, and place them in appropriate locations, with the fast items being placed where they can be reached quicker.”

According to Karrenbauer, it is also important to examine average and peak picking days and to store high-velocity SKUs in readily accessible and ergonomically friendly areas. If an SKU is affected by seasonality or a special promotion, he said, it should also be made readily accessible.

“At the higher level, SKU velocity is the cornerstone of understanding the center store of a supermarket and what drives automated replenishment to new product introduction,” says Phil Friedman, vice president, Consumer Products and Life Sciences, QAD, Inc., a provider of enterprise applications.

Understanding SKU velocity is critical for accurate forecasting, according to experts. Friedman offered the following:
“Some of the other components are how you view seasonality. With beverages, there is heavy competition and a huge increase in the SKU base,” he says. “If SKUs are growing 15 percent to 20 percent per year and shelf space is growing at 3 percent to 5 percent you just do the math and see the risk/reward for new product introduction.”  

According to Karrenbauer, knowing your inventory to the SKU level is key to removing time from the supply chain.
“In addition to examining velocities over a historical period of time to establish a baseline, also consider SKU rotation: the obsolescence of old items and introduction of new items, projected growth rates in sales, and the resulting implications for on-hand inventory changes.”

Understanding SKU velocity remains key to implementing warehouse processes. It has implications for labor and the selection of technology to get the job done efficiently.  

“Picking labor is 50 percent or more of DC labor, so implementing processes that reduce labor should have a high priority, while the second priority should be picking accuracy,” says Paul Lightfoot, CEO and president, AL Systems, a supplier of software solutions for improving distribution.  

He adds that selecting the right picking technology—voice, lights, RFID, or a hybrid of these—in conjunction with SKU velocity, causes productivity improvements and order accuracy.

“The elements of inventory velocity, from a total supply chain perspective, can be identified as the elapsed time it takes for product to travel the entire length of the supply chain,” says Karrenbauer. “Specifically, these can be further identified as the time taken to source from suppliers, manufacture the products, distribute them, process the order, and deliver the products to the customer.”

He also says that there are specific strategies for improving inventory velocity in each of these time elements. For warehouse operations and order fulfillment, the most significant approaches to improving inventory velocity are based on inventory management practices designed to improve operator productivity. This allows the operation to respond rapidly to customer orders.

Lightfoot gives the example of one beverage distributor that uses a mix of lights and voice picking technologies with 1,000 fast-moving SKUs in one area of the DC and 9,000 slow-moving SKUs in another area.  

“Operators equipped with voice technology in the slow-moving SKUs area fulfill orders at 150 picks (or reaches) per hour (RPH),” he says, “while operators directed by lights in the fast-moving SKUs area fulfill orders at the rate of 500 RPH.”
On a blended basis, he adds, all operators can fulfill orders at approximately 370 RPH. If the DC had chosen an all voice solution, it would require 48 operators to fulfill orders and more than US$215,000 investment costs. If they had chosen an all lights solution, it would require 26 operators to fulfill orders and more than US$800,000 investment costs.

“Knowing the SKU velocity and which technology works best for slow-moving SKUs (voice) and fast-moving SKUs (lights), resulted in an investment of $125,000 and requires 27 operators to fulfill orders in both areas,” Lightfoot concludes.

In many companies, a small set of SKUs generates most of a company’s revenue and volume. Focusing on these products offers the greatest opportunity for financial impact, according to Karrenbauer.

Friedman, who formerly worked for Phillip Morris (owner of Miller beer at the time) cited a precise integration of demand planning, financials, trade promotions and allotments. Demand planning, he adds, is driven by such factors as scan data, last year’s sales and seasonality.

“Your financials capture all of that information and uncovers whether or not it was profitable for you and the retailer; how many units were sold by region and by store; and in those regions if the estimates were correct,” he says.

Karrenbauer says that in order to drive down average inventory and increase turns, there must be an integrated approach to the supply chain and collaboration between supply chain partners.   

“To keep inventory constantly moving, an order can trigger inventory delivery from suppliers and a work-order release to the factory floor,” he says.     

What is next for SKU velocity as it relates to the future of the beverage business? “On the shelf, there will continue to be a proliferation of new products and line extensions,” says Friedman. “Rapid growth will continue although shelf space will not. That is the challenge.”

From Beverage World October 15, 2008