Inventory allocation can make or break your order fulfillment process. It’s all about distributing the right products to the right places to meet customer demand efficiently.
Whether you’re facing seasonal fluctuations, sudden demand surges, or the challenges of multi-channel sales, mastering inventory allocation is key to delivering orders quickly and correctly. In this guide, we’ll explore the world of inventory allocation, its benefits and challenges, and best practices.
What is inventory allocation?
Allocating inventory is the strategic distribution of goods across your company’s network and storage locations. If you have warehouses in different states, it’s important to know how much stock is in each location — and to keep products where you’ll need them. This ensures the right products are available to meet customer demand, especially when that demand varies due to differences in locations, seasons, or promotions.
A classic inventory allocation example would be a national retailer selling winter clothing. They might know there’s a higher demand for heavy coats in their northern stores compared to their southern stores due to regional climate differences. To optimize inventory, they strategically allocate more coats to the north and fewer to the south. This prevents stockouts in the north, minimizes excess inventory and holding costs in the south, optimizes shipping costs, and improves customer satisfaction.
The benefits of inventory allocation
Effective inventory allocation leads to happier customers, lower costs, optimized warehouse space, and more. Here’s more about each of the main benefits of great product distribution:
1. Meeting customer demand
By strategically positioning inventory closer to customers, you ensure that products are readily available when and where they’re needed. This leads to improved order fulfillment rates and happier customers, meaning inventory allocation improves both customer satisfaction and your brand’s reputation.
2. Preventing stockouts
Proper allocation helps prevent overstocking and understocking, which are both costly. Overstocking ties up capital in excess inventory and holding costs, while understocking leads to lost sales and potential customer dissatisfaction — or even stockouts, when you don’t have any product to fill orders with.
Imagine a clothing retailer that overstocks winter coats in a region with a mild climate. This ties up capital, incurs additional storage costs, and necessitates markdowns to sell the excess inventory. If they choose to ship it to a colder climate, they’re spending extra on relocating inventory that could’ve been better allocated from the beginning.
3. Faster delivery times
Strategically located inventory reduces shipping distances and times, getting products into customers’ hands faster. For instance, an e-commerce business that strategically places inventory in fulfillment centers near major cities can offer faster shipping options, such as same-day or next-day delivery, increasing customer satisfaction and gaining a competitive advantage.
4. Maximizing revenue
Efficient allocation ensures that you have the right products where they’re needed, allowing you to capitalize on sales opportunities and maximize revenue potential.
5. Reducing storage costs
Regardless of where you store inventory, it’s costing you. Warehouse space, staff members, and overhead costs all add up. And the longer you hold the product, the more it impacts your bottom line. Allocating stock strategically improves turnover rates and reduces those holding costs.
6. Efficient multi-channel management
If you sell through multiple channels (like online, in retail stores, and wholesale), inventory allocation maintains optimal stock levels across all channels to ensure a seamless customer experience. Inventory allocation guarantees popular items are available in every channel, preventing customers from being disappointed when they can’t find a product they want.
The challenges of inventory allocation
While the benefits are undeniable, inventory allocation comes with challenges:
1. Unpredictable demand surges
Unexpected spikes in demand strain allocation strategies. These surges can be challenging to anticipate and manage, whether due to seasonality, promotions, or external factors. A natural disaster or change in consumer preferences can lead to unexpected demand spikes that disrupt inventory allocation plans, requiring quick adjustments to avoid stockouts.
2. Reliance on real-time visibility
Since demand can fluctuate rapidly, having visibility into inventory levels is crucial to making effective decisions about allocating inventory. For example, a sudden surge in demand for a particular product due to a viral social media trend can quickly deplete inventory, and if you aren’t aware of your stock’s movement, it may lead to missed sales opportunities and frustrated customers.
3. Forecasting challenges
Accurately predicting future demand is a perennial challenge. Inaccurate forecasts can lead to either overallocation or underallocation of inventory, both of which have negative consequences. As mentioned above, holding excess inventory is expensive, but stockouts or long delivery times lead to unhappy customers.
4. Suboptimal decision-making
Without the right tools and data, inventory allocation decisions aren’t based on solid analysis. This can result in inefficient allocation and missed opportunities. Thus, if you’re going to do inventory allocation, you need to make sure you’re relying on the right technology and reports, not guesswork.
5. Complex supply chains
As supply chains become more global and intricate, managing inventory allocation across multiple locations, warehouses, and distribution centers becomes increasingly complex. A manufacturer with suppliers and customers in different countries needs to consider factors like lead times, transportation costs, and customs regulations when allocating inventory. And that’s before you create contingency plans about how to tackle common supply chain risks.
Types of inventory allocation methods
There are three primary inventory allocation methods, each with its own strengths and weaknesses:
1. Push method
In this method, inventory is “pushed” from the central warehouse to various locations based on forecasts and predetermined distribution plans. It’s a proactive approach that allows for better planning and resource allocation, but it makes it harder to respond to real-time demand fluctuations. For example, a beverage company might use the push method to distribute its products to retailers based on historical sales data and anticipated demand for upcoming holidays or events.
2. Pull method
The pull method relies on customer orders to trigger inventory movement. Inventory is “pulled” from the central warehouse to fulfill specific orders as they come in. This method is more reactive than the push method, and it can better adapt to demand changes, but it may lead to longer lead times and potential stockouts if demand suddenly spikes.
3. Just-in-Time (JIT) method
The JIT method aims to minimize inventory holding costs by only receiving inventory when it’s needed for production or customer orders. It requires precise coordination with suppliers and can be vulnerable to supply chain disruptions, but it significantly reduces inventory carrying costs and improves cash flow.
A car manufacturer that uses the JIT method might receive parts from suppliers just in time for assembly, reducing the need for extensive inventory storage spaces and the associated costs.
In addition to these methods, there are two main approaches to inventory allocation:
1. Manual allocation
This involves decision-making based on experience, intuition, and available data. While it offers flexibility and allows for nuanced decision-making about when to order, it can be time-consuming, prone to errors, and may not be scalable for larger businesses. A small business owner might manually allocate inventory based on their knowledge of customer preferences and local demand patterns, but this approach can become overwhelming and impractical as the business grows.
2. Automated allocation
Automated systems use algorithms and data analysis to optimize inventory allocation decisions. This approach is more efficient, scalable, and data-driven, but it may lack the nuance of human judgment in certain situations and requires careful setup and monitoring. A large retailer with a vast product catalog and numerous distribution centers might use an automated system to optimize inventory allocation across its network and only intervene manually when needed.
Factors to consider when allocating inventory
Here’s what to consider when devising your inventory allocation strategy:
1. Customer demand fluctuations
Analyze historical sales data, seasonality trends, and promotional activities to understand how customer demand varies over time. This will help you reallocate stock accordingly, like moving light jackets to coastal regions during summer.
2. Inventory levels
Regularly monitor your inventory levels across all locations to ensure there’s enough stock to meet demand. Use inventory management software to track inventory in real time. This is particularly crucial for businesses with perishable goods, such as a bakery, where real-time inventory tracking can help prevent spoilage and waste, or for companies with high-value items, where accurate inventory tracking is essential for security.
3. Warehouse storage capacity
Consider the physical limitations of your warehouses and distribution centers. You don’t want to store products in your East Coast warehouse if it sells better in California. But your biggest warehouse might be in the Midwest, leading you to keep high-conversion products in the middle.
Regardless of what you keep in each location, organize inventory in a way that balances storage space with efficient order fulfillment to make picking and packing easier. If your largest items are the most in demand, don’t put them in the back. Keep them where they’re easy to access.
4. Allocation adjustments
Be prepared to make adjustments to your allocation strategy as market conditions change. Regularly review and refine your approach based on real-time data and feedback. For instance, a company might experience a sudden increase in demand for a particular product due to a positive review. It then needs to reallocate stock to ensure that the product is available where it’s needed most, which might mean pulling inventory from other locations or expediting shipments from suppliers.
Best practices for inventory allocation
Now that you know why distribution matters and the associated challenges, we have some best practices to optimize your inventory allocation strategy:
1. Utilize real-time data
Leverage technology and data analytics to gain real-time insights into inventory levels, demand patterns, and sales trends. Making data-driven allocation decisions and responding quickly to changes makes your operation more efficient.
2. Conduct market research
Take the time to conduct routine research about market trends, competitor activities, and emerging customer preferences. Investing the extra time might seem overwhelming, but this knowledge helps you better anticipate demand shifts and adjust allocation plans proactively.
3. Prioritize high-conversion locations
Identify the locations or channels that generate the highest sales and prioritize inventory allocation to those areas. Assessments like an ABC analysis can show you which are your highest value products — but you can further that by conducting analyses at each location. Stock each location with the items you’re most likely to sell there.
4. Automate for efficiency
Choose an inventory management software option that automates routine allocation tasks, such as replenishment orders and stock transfers, so your team can focus on filling those orders.
Ready to optimize your inventory allocation strategy?
Planning an inventory allocation strategy doesn’t have to be hard — Fishbowl can help.
Our all-in-one inventory management software empowers you with comprehensive inventory control. You can track inventory levels in real time, automatically generate purchase orders for replenishment, use transfer orders to move stock between locations, and make data-driven allocation decisions to enhance customer satisfaction and maximize your business potential. Reach out to schedule a demo today.