Measuring and Improving Inventory Velocity

Measuring and Improving Inventory Velocity

Measuring and improving Inventory Velocity requires a mix of clear formulas, clean data, and process changes that align procurement, warehousing, and sales. This guide walks through the practical steps to measure velocity accurately, the KPIs you should monitor, and proven tactics to raise velocity without sacrificing customer service.

Step 1: Choose the right measurement approach

• Basic unit-based velocity: Units moved (shipped/sold) during a period divided by average units on hand in that period. Useful for discrete, high-SKU-count operations.

• Monetary velocity: Value of goods moved (COGS or sales value) divided by average inventory value. Useful when SKU prices vary widely.

• Days-based approach: Velocity expressed as turns or days of inventory: Inventory Turns = COGS / Average Inventory; Days of Inventory = 365 / Inventory Turns. This is the preferred format for comparing performance across industries.

Example calculation (unit-based): A fulfillment center ships 18,000 units of product A in 90 days. Average on-hand is 3,000 units. Inventory Velocity = 18,000 / 3,000 = 6 (turns per quarter). This tells you the average unit is replenished every ~15 days (90 days / 6).

Step 2: Ensure data quality

• Make sure transactions recorded by your WMS or inventory system include receipts, returns, adjustments, and shipments. Missing or mis-timed transactions will distort velocity calculations.

• Use consistent averaging methods (e.g., daily on-hand snapshots averaged over the period) rather than single-point snapshots that can be skewed by peaks.

• Segment SKUs for clearer insight: fast, medium, slow based on historical velocity bands (e.g., top 20% fast, middle 60% medium, bottom 20% slow).

Step 3: Track complementary KPIs

• Inventory Turns: A well-established metric closely related to velocity.

• Days of Supply / Days Inventory Outstanding (DIO): Shows how long inventory will last at current demand.

• Fill Rate / Service Level: Ensures velocity improvements don’t cause stockouts.

• Lead Time and Variability: Supplier lead time and its variability directly affect safety stock and therefore velocity.

• Stockout Frequency and Backorder Rate: Monitor for unintended consequences of faster stock reduction.

Step 4: Operational levers to improve velocity

• Improve demand forecasting. More accurate short-term forecasts reduce safety stock and dampen order variability. Use rolling forecasts and combine historical sales with promotion calendars.

• Shorten lead times. Work with suppliers to reduce order-to-delivery time. Consolidating suppliers or changing transport modes (e.g., air for critical items) can reduce required on-hand levels.

• Optimize order policies. Move from fixed large batch orders to more frequent, smaller replenishments where feasible (e.g., continuous replenishment, vendor-managed inventory). Calculate economic order quantities with velocity in mind.

• Slotting and pick method optimization. Put high-velocity SKUs in fast-pick locations, use zone or batch picking, and configure pick paths to increase throughput and reduce handling time.

• Cross-docking and flow-through. For very high-velocity SKUs, bypass storage and move receipts directly to outbound staging to cut dwell time to near zero.

• SKU rationalization. Identify slow movers for discontinuation, bundling, or alternate fulfillment strategies (e.g., direct ship from vendor).

• Master data and packaging optimization. Standardize pack sizes and barcoding so that replenishment and counting are reliable—errors inflate perceived inventory and depress measured velocity.

• Improve returns processing. Fast inspection and restocking of returns recovers sellable units quickly and improves throughput metrics.

Step 5: Use technology and automation

• WMS and inventory analytics. Use your WMS to compute SKU-level velocity automatically and drive slotting or replenishment rules.

• Demand planning tools. Integrate forecasting software with inventory systems to set dynamic reorder points based on predicted velocity changes.

• Robotics and automation. For very high-velocity operations, automated storage and retrieval systems (AS/RS), conveyors, or pick-to-light solutions raise throughput and reduce handling times.

Step 6: Implement an iterative improvement process

• Run small pilots (e.g., change replenishment frequency for a subgroup of SKUs) and measure the impact on velocity, fill rate, and cost.

• Create a cross-functional review cadence (procurement, operations, sales, finance) to align on targets and trade-offs—velocity objectives often create tensions between departments.

• Use dashboards that show velocity trends, exceptions, and the drivers behind changes (promotions, supplier issues, seasonality).

Practical example

A retailer found that 15% of SKUs consumed 60% of storage space because of large order minimums from suppliers. By renegotiating minimum order quantities and moving fast SKUs to a flow-through model, the retailer reduced average inventory by 22% and improved on-shelf availability for other SKUs—raising average site inventory velocity by 18% within two quarters.

Final Guidance

Focus on measurable, reversible changes to avoid service degradation. Inventory Velocity is not a vanity metric—use it with service-level targets and a clear understanding of supply variability. When measured cleanly and acted upon thoughtfully, velocity improvements lower cost, improve space utilization, and speed customer response.