Having the right amount of inventory in the right places is a critical component of inventory management. Let’s say you’re a clothing retailer with multiple locations across the U.S. How do you make sure each one of your stores is sufficiently stocked to meet customer demand? Should each location carry equal amounts of the latest designer jeans, for example, or should more go to locations in colder climates? How much inventory should you keep in your warehouse to fulfill online orders? These decisions, and more, underscore the importance of a sound inventory allocation strategy. Among the benefits, proper inventory allocation cuts down on storage costs, speeds order fulfillment and ultimately leads to higher profitability.
What Is Inventory Allocation?
Inventory takes many forms, including products ready for sale; components of unfinished products, such as nuts and bolts; and raw materials, such as steel and wood. Inventory allocation focuses on strategically distributing and tracking these SKUs across the different locations within a company’s network, such as its physical stores, warehouses, distribution centers and factories. Based on the real-time tracking and analysis of inventory levels and customer demand forecasts, inventory allocation paves the way for supply chain efficiency and its many related cost savings.
- Inventory allocation is a data-driven process that determines where and how much inventory should be sent to individual locations across a company’s distribution network.
- Inventory allocation helps meet customer demand in the most efficient way possible, starting at the manufacturing level where it’s used to avoid production bottlenecks.
- Companies rely on three main types of inventory allocation methods: pull, push and just-in-time.
Inventory Allocation Explained
Inventory allocation, also known as stock allocation, is the process of strategically allotting accurate amounts of goods and materials throughout a company’s distribution network. Aligned with customer demand, which often varies from one geographical site to the next, inventory allocation means store shelves will remain properly stocked and online orders will arrive quickly and less expensively because they are shipped from warehouses that are closest to the customers. In addition, product manufacturing can get underway quickly because the necessary parts and materials are on hand, while warehouse space is optimized for the appropriate amount of storage.
When Is Inventory Allocated?
Inventory allocation is an ongoing process that should be adjusted according to customer demand, fluctuations in inventory levels, warehouse availability and overall supply chain efficiency. For example, if those aforementioned designer jeans are sitting on the shelves at three stores in Florida but are close to selling out at two shops in Maine, it would make sense to reallocate the items north so as not to run out where they’re in demand. Inventory management software tracks stock levels so that decision-makers can monitor where their inventory is best served.
Benefits of Inventory Allocation
The total cost of inventory extends beyond how much money it takes to produce or purchase a product to be sold. It also includes expenses related to ordering, shipping and storing inventory in warehouses and distribution centers; economic order quantity; lost revenue in the forms of dead stock, stockouts and wasted storage space; and associated labor costs. Effective inventory allocation helps a business contain these expenses by ensuring that stock levels are optimized across its supply chain to swiftly meet customer demand. Additionally, you’ll need to understand what you have on the shelf and what is allocated to future orders to aid in replenishment. Savings can be reinvested in the business and improve the company’s financial standing.
In manufacturing, proper inventory allocation ensures that the right materials are in the right facilities for product production. Waiting for parts to arrive when there’s a sudden uptick in demand can delay the manufacturing process, leading to lost sales and customers taking their business elsewhere.
On the retail level, allocation can speed shipping and delivery by placing inventory closer to the customers who want to buy it, whether in physical stores or nearby warehouses so as to minimize delivery times. This is especially important in the case of perishable goods, where every day of misallocation brings the items closer to their expiration dates.
In summary, the benefits of inventory allocation include the following:
- Reduced cost of inventory
- Optimized stock levels across the supply chain
- Improved ability to meet customer demand
- Reduced manufacturing delays
- Minimized sales losses
- Improved shipping speed
- Reduced delivery times
Challenges of Inventory Allocation
Without the right technology and systems to track inventory levels and customer demand across a company’s supply chain, inventory allocation becomes little more than a guessing game. Indeed, lack of real-time visibility into inventory can misinform inventory-related decision-making, including where to store products, how much to produce and when it’s time to reorder. The inability to accurately understand what inventory is allocated to fulfill future demand can lead to too much or too little inventory allocated in the wrong channels or regions, along with unnecessary carrying costs.
Naturally, even the best technology can’t predict every supply chain bottleneck, inventory shortage or change in customer demand that may impact an otherwise effective inventory allocation process. An earthquake or tornado, for example, can temporarily shut down the operations of a major manufacturing plant or destroy warehouses that store inventory. Businesses are well advised to have plans already in place that address how to handle such situations.
Challenges of inventory allocation without the right systems include these issues:
- Lack of real-time visibility
- Poor inventory-related decision-making
- Inability to determine future demand
- Wrong inventory levels in the wrong channels or regions
Inventory Allocation Methods
Businesses may use one of several methods to determine how best to allocate inventory across their distribution points. One method responds to customer demand, one seeks to create it and a third combines both approaches.
This allocation method is based on the “pull” of customer demand for products. In other words, inventory is sent to where customer demand justifies it need to be. This minimizes having excess inventory and helps keep storage costs low, though it could potentially leave a company scrambling to fill its shelves should demand suddenly change. Companies that sell specialty products or that repair items requiring new parts typically rely on pull allocation.
Rather than waiting for customers to send the signal, the push model seeks to create product demand so as to “push” inventory out to buyers. Push allocation relies on the accuracy of demand forecasting models that predict sales based on the analysis of internal and external data, including historical data. A retailer stocking up on school supplies early in the summer is an example of the push allocation method. The same goes for the manufacturers that produce the school supplies and stock their warehouses and distribution centers with properly allocated levels of inventory months before school is back in session.
Just-in-time (JIT) allocation uses a mix of push and pull methods to get as close as possible to having “just enough” inventory on hand where it should be to meet demand. A common JIT strategy among manufacturers is to keep components and raw materials on hand but wait until customer demand warrants production. The same strategy works for restaurants, which keep frozen or unassembled food ready to prepare for customers’ orders. The danger of JIT allocation lies in a supply chain disruption, as was rampant during the COVID-19 pandemic. Having accessible safety stock so as to not run out of inventory may help cushion the blow, though the ability to do so wouldn’t be viable for businesses like flower shops.
Manual vs. Automated Inventory Allocation
It’s not unusual for small shops to manage their inventory manually, using simple spreadsheets or stock books. For a business with a limited product selection, manually tracking inventory — as in physically counting how much is in stock — might seem reasonable, albeit error-prone. But as the business grows, adds new products, opens new locations, ships to new regions and works with more suppliers, automating the inventory allocation process becomes more necessary. This speaks to the need for an enterprise resource planning (ERP) system or inventory management system that tracks inventory levels in real time, monitors customer demand, streamlines order fulfillment and reallocating, and handles other forms of inventory control.
Inventory Allocation Methods
|Pull Allocation||Push Allocation||Just-in-Time Allocation|
|Based on:||Customer demand||Creating demand||Customer demand|
|Pros:||Demand is already there, so risk of overstocking is minimal.||Bulk shipping can reduce costs, and businesses can push high-profit over low-profit products.||JIT minimizes risks of over- or understocking because demand is “just met”.|
|Cons:||The manufacturing process is slower as products are created as orders come in.||This method can be expensive and wasteful if forecasted demand is higher than actual demand.||A sudden increase in demand or a supply chain breakdown can quickly deplete stock and leave shelves bare.|
Four Inventory Allocation Rules and Best Practices
As with other inventory management processes, there is no one-size-fits-all list of rules for inventory allocation. Every industry has its own idiosyncrasies, and each company has its own needs, challenges and resources available to meet demand for its unique customer base. So, consider the following less as “rules” and more as best practices that can be modified and adapted to accommodate your business.
Conduct market research and consider regional demand.
A successful inventory allocation strategy ensures that inventory levels match customer demand wherever that demand may be. This requires careful analysis of market trends, buyer behaviors, geographical trends and other patterns that may inform decision-making. Research can shed light beyond how much inventory to allocate among a company’s distribution points to also embrace variations of inventory. For example, a retailer of T-shirts will likely know that industry research shows size large is bought most frequently. So, it makes sense to allocate more large T-shirts across all locations — particularly during the summer when most people wear T-shirts — and then track stock levels to be sure that the supply is meeting demand.
Consider items with shorter shelf lives to have higher priority.
Shelf life and expiration dates should be top priority when allocating inventory in food, cosmetics, flowers and other products with a finite life span. Items with the earliest expiration dates should be allocated first to locations with higher volumes of sales to minimize financial losses. Grocery stores, for example, tend to put milk with the soonest sell-by date up front so customers grab those cartons first. This could also apply to “fad” items for which demand lasts a short period of time.
Use real-time data.
Hand in hand with the first guideline, the real-time tracking of inventory levels across a business’s supply chain can most accurately guide how much and where inventory should be allocated and replenished. Data analysis and demand forecasting can expand know-how by identifying trends and patterns in customer demand that may influence inventory allocation decisions. It aids in using data proactively, such as when you’re selling through in one location and not another — real-time data would allow workers to see this and move the inventory to sell through.
Automate what you can.
Especially as a business grows, the ability to automate inventory allocation can take the heavy lifting off of employees, who no longer have to manually track stock levels across multiple locations to make sure they match customer demand. Automation cuts down on both labor costs and errors inadvertently made by employees, tracks inventory throughout the supply chain, speeds order time and replenishment, optimizes storage space and can lead to greater profitability.
Factors to Consider in Inventory Allocation
It’s important to be methodical and data-driven when deciding how to distribute inventory most effectively. Customer behavior and regional trends may change, for example, and a good inventory management system should be able to make any necessary adjustments. Among the factors to consider in inventory allocation:
Inventory levels and the speed at which they increase, decrease or barely budge speak volumes about what customers want. Demand-forecasting tools can help create a fuller picture about what customers may soon be clamoring for, based on historical trends and sales forecasts.
Determining and allocating the right amounts of inventory across a supply chain can be a balancing act of too much vs. too little, though either extreme puts a business at risk of financial loss. Overstocking often results in higher carrying and labor costs, as well as the expiration of perishable inventory. Understocking can lead to stockouts and lost revenue. It may also mean customers end up buying from your competitors instead.
Physical storage space.
Where you allocate your inventory, whether in a backroom, warehouse or fulfillment center, is another consideration. The closer inventory is to where it’s needed, the quicker it can get into customers’ hands and, hopefully, lead to repeat business. It can also result in shorter shipping times and reduced cost. Additionally, decisions about inventory allocation should factor in how much storage space is available, keeping in mind the potential for overcrowding or not filling already-paid-for shelves in a facility.
Inventory allocation isn’t only about where to distribute ready-to-sell products. It also includes determining the best placement of partially completed products and items needed to produce those products, such as components like nuts and bolts, raw materials and product packaging. Known collectively as work-in-progress (WIP) inventory, these must be tracked and properly allocated throughout the supply chain to ensure that they’re available when and where they’re needed to avoid production bottlenecks and potential delays.
As mentioned above, too little or too much inventory at any given location can hurt a business financially. Reallocation of inventory to accommodate demand can help, providing the company can still make a profit. Otherwise, it may be less costly to keep items in their original locations and know better the next time.
Improve Inventory Allocation With Automation
NetSuite Inventory Management Software (IMS) provides real-time inventory visibility across the many places inventory can be allocated and managed, including retail stores, warehouses, distribution centers and manufacturing facilities. IMS automates the process of tracking, replenishing and allocating inventory to ensure that the right items are available in the right quantities and at the right times and places. This includes allocation of raw materials and components at factories, as well as products ready for sale. All of these details feed into NetSuite’s Demand Planning tool, which also accesses historical data and sales forecasts to help inventory leaders plan for future demand.
From gathering the materials needed to first manufacture a product to a customer pulling that product off a store shelf, having sufficient inventory at the ready is what allocation is all about. Best left to automation for the highest level of accuracy, proper inventory allocation minimizes losses due to overstocking and understocking, cuts down on storage and possible reallocation costs, helps maintain supply chain efficiency — and makes sure companies don’t miss out on a single sale.
Inventory Allocation FAQs
What does allocation mean in inventory?
Inventory allocation is the process of strategically allotting accurate amounts of goods and materials throughout a company’s distribution network. Aligned with customer demand, inventory allocation means store shelves remain properly stocked, and online orders arrive quickly and less expensively because they are shipped from warehouses that are closest to the customers. In addition, product manufacturing can get underway quickly because the necessary parts and materials are on hand, while warehouse space is optimized for the appropriate amount of storage.
What is allocation in warehouse?
Warehouse allocation can be a big-picture process that determines which warehouses among many get which goods for distribution. This can lead to quicker and more affordable shipping options when high-demand locations sell out. Warehouse allocation can also refer to a more microfocused process, such as where to properly distribute stock within one warehouse. Many warehouses will use internal allocation to keep high-turnover or perishable goods visible and up front, whereas long-term stock may be placed farther away or at an off-site location.
What is allocation in supply chain?
Supply chain allocation describes the process of determining where to locate inventory and at what quantities along a company’s variety of distribution points, such as a retail store, warehouse or distribution center. Efficient allocation can help pare carrying costs and meet customer demand.
What does allocation mean in manufacturing?
Allocation in manufacturing means that the necessary quantity of materials is available throughout a company’s myriad facilities to ensure that the flow of production meets customer demand.
What does going on allocation mean?
When inventory “goes on” allocation, it means an item has been allocated for release from the warehouse but is still there.