Everything You Should Know About Inventory Allocation

One of the most crucial aspects of efficient inventory management is ensuring that you have the appropriate amount of inventory where its needed.

Assume you are a company selling electronic appliances in multiple cities across the Middle East; you need to ensure that all your stores have adequate stocks to fulfil consumer requirements.

How will you do that? By distributing your entire inventory equally across all stores?

How much should your central warehouse hold so that online order fulfilment can be carried out quickly?

There are numerous decisions to be made – which brings us to the importance of inventory allocation.

The right allocation strategy can help you fulfil orders quickly, reduce storage costs, and enhance your bottom line.

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What Is Inventory Allocation?

Raw materials like metal and glass, parts of unfinished goods like screws, and goods ready to be sold, are all part of inventory.

Inventory allocation is concerned with the strategic distribution and tracking of various SKUs across multiple warehouses, factories, stores, and distribution centers in a company’s network.

Inventory allocation considers demand forecasts, and tracks and analyses inventory in real-time to boost the efficiency of your supply chain.

Inventory Allocation Explained

Inventory allocation is nothing but the process of strategic allocation of accurate quantities of goods and materials across the distribution network of an organization.

When it is aligned with consumer demand, which itself differs according to geographical locations, inventory allocation ensures that shelves in stores are stocked appropriately and that online orders will be delivered economically and quickly, as the warehouses chosen for fulfilment are the ones nearest to the customer location.

As the requisite materials and components are available on hand and the warehouse space is optimized, manufacture of products can be carried out without delays.

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When Is Inventory Allocated?

Inventory allocation is a continuous process that needs to be adjusted as per the efficiency of your supply chain, consumer demand, availability of warehouse, inventory level fluctuation, etc. continuing with the example of the appliance store, let’s suppose that food processors are close to selling out in your stores in Riyadh but are lying unsold in your Dammam stores.

It makes sense to reallocate those food processors to Riyadh so that you can continue to meet consumer demand there.

Inventory management software keeps track of stock levels, allowing you to see where you need to allocate your inventory for maximum revenues.

The Need for An Inventory Allocation Strategy

The knowledge of how much inventory is required in every warehouse, and how much you can store, will significantly help in optimizing your supply chain.

It helps to optimize inventory levels, avoid under and over-stocking, and reduce storage expenses.

E-commerce inventory levels tend to always fluctuate, and more so if you have multiple sales channels.

Inventory management software helps to track inventory in real-time, giving you a clear idea of the status.

A tech-driven strategy of inventory allocation can help in mitigating risk and streamlining your distribution network.

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The Risk of Overstocking

One of the easiest things to do to ensure fulfilling consumer demand is ordering a lot of stock; however, it is hardly the most economical.

It can raise your carrying costs substantially.

You are also quite likely to end up with dead stock – spoilt, expired, or obsolete products, which can’t be sold at the usual price.

You have to plan how you can optimize inventory levels by factoring in emerging inventory trends, turnover, and historical data.

The Risk of Overselling

You may suddenly see a huge spike in demand for any reason like trends, FOMO effect, etc.

You may realize to your horror that you don’t have sufficient stock to meet this demand, and are forced to take several backorders.

This is not an ideal situation, as customers have to pay first and wait for a while before their product is shipped.

In case the customer has placed orders for multiple products and a few are available currently, you would want to ship them out immediately, but it also causes a split shipment.

While this is not entirely bad, your shipping and packaging costs will be higher.

To meet high demand caused by seasonality or special promotions and to meet future demand, be sure to stock adequate inventory.

Efficient Multichannel Management

When you add more sales channels, you have to track inventory forecasts, reorders and inventory levels across multiple sources, making inventory allocation more difficult.

Of course, the right software like Tranquil can help significantly, allowing you to track inventory from a single dashboard.

Building a Foundation to Scale

When you implement technology, you can make informed decisions about inventory allocation to save time and money, and build the base for your business to grow.

However, it can take some time and money at the outset, and be a bit daunting to get used to.

The benefits of tech implementation are experienced in the long term.

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Benefits of Inventory Allocation

The total cost of inventory includes all costs related to orders, shipping, storage, lost revenues in the form of stockouts, dead stocks, carrying costs, and labor expenses.

By effectively allocating your inventory, you can reduce these costs and ensure optimal stock levels across your supply chain to meet consumer demand quickly.

You also need to know your current stock, and what has been allocated to future orders to help replenish the current stock.

The money saved can be reinvested in marketing and growth activities.

The right inventory allocation ensures that the correct materials are available where required for production; manufacturing can be carried on smoothly and without delay, without having to wait for materials or parts when there’s a surge in demand.

This helps to fulfil consumer demand and build loyalty.

In retail, proper allocation can ensure quick shipments and on-time deliveries, as inventory gets stored closer to customers who order more, and delivery times are shortened.

It is especially valuable for delivery of perishables as every day of improper allocation shortens their shelf life.

To put it in a nutshell, inventory allocation:

• Brings down inventory cost
• Enhances ability to fulfil consumer demand
• Optimizes stock levels throughout the supply chain
• Brings down delays in manufacturing
• Reduces losses in sales
• Quicker shipping
• Faster deliveries

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Challenges of Inventory Allocation

Inventory allocation can be very daunting without proper technology and systems.

Without real-time visibility into your inventory, every decision you make about storage, reordering, and production, can become guesswork.

Without knowing the inventory allocated for future demand fulfilment, you could end up with wrong quantities allocated to incorrect locations or channels, leading to avoidable carrying costs.

Obviously, no technology can foresee every change in consumer demand, every possible bottleneck, or shortage in inventory that could affect the allocation process.

Natural disasters, political unrests, and other unpredictable events can stop manufacture, delay shipping, and destroy warehouses.

It is imperative that you have backup plans to deal with such circumstances.

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Inventory Allocation Methods

There are several methods used to allocate inventory; however, the following are the most popular:

1. Pull Allocation

Inventory is allocated as per consumer demand – you will avoid overstocking and ensure low carrying costs.

However, if demands shift suddenly, you may have to rush to re-allocate your inventory.

This method is typically followed by companies selling custom or specialty products, or those that repair products calling for new parts that depend on pull allocation.

2. Push Allocation

This is the opposite of pull allocation; here the inventory is ‘pushed’ out to buyers based on demand forecasts.

For example, a retailer may stock up on excess TV sets a few months before a major sports event like the Olympics or Soccer World Cup.

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3. Just-in-time Allocation

This inventory allocation method is a combination of push and pull methods, and aims to have inventory on hand that is just sufficient to meet demand.

A manufacturer may have materials and parts on hand, but wait for demand to spike before they begin production.

Restaurants may freeze bases, or prepare half-cooked dishes which can be fully cooked when customers order a dish.

However, in situations of supply chain disruption, as it happened during the pandemic, this can become problematic, and it may be wise to have adequate safety stock.

4. Manual vs. Automated Inventory Allocation

Small businesses often perform inventory allocation and management manually, with the help of spreadsheets and stock books.

While this can cause errors, it may still be reasonable if you have a limited product portfolio.

However, when your business grows and you add more products, locations, vendors, customers, regions, etc., it becomes essential that you automate.

Tranquil ERP can track inventory in real-time, monitor consumer demand, streamline processes like allocation and order fulfilment, and more.

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Inventory Allocation Best Practices

Each industry has its own peculiarities, and each business, its own requirements; there isn’t a single ‘right’ way of inventory allocation.

Keep these guidelines in mind:

Do Market Research and Study Regional Demand

Inventory levels should ideally match consumer demand for inventory allocation to be successful.

This means carefully analyzing market trends, geographical patterns, customer behavior, and anything else that may impact decisions.

By researching the market, you can understand how much inventory must be allocated across your distribution network, and more.

Like, research says that 50-inch TV sets are the most popular; so, after you allocate a greater number of 50-inch TV sets to all your locations, you also need to track sales and inventory levels to make sure that you have adequate supply to meet the demand.

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Prioritize Items with Shorter Shelf Lives

Perishable items like food, medicines, cosmetics, toiletries, flowers etc. must be prioritized according to their expiry dates.

Items due to expire the soonest must be allocated to wherever sales are the highest, to keep losses low.

This rule can be applied to items which are flash-in-the-pan – short-lived popularity.

Use Real-time Data

Real-time inventory level tracking through the supply chain can give you a fair ideal of how to allocate inventory, and replenish it.

By using demand forecasts and analyzing data, you can improve knowledge about trend identification and customer demand patterns, and take better inventory allocation decisions.

When you proactively use the data, like seeing where you are selling through and where you are not, you can move your inventory to ensure it gets sold through.

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Automate Where Possible

Automating inventory allocation when your business grows can free your employees from having to track stock levels manually across locations to help meet consumer demand.

Automation eliminates human error and reduces labor expenses, monitors inventory across the supply chain, shortens order time and replenishment, optimizes storage, and enhances revenues.

Factors to Consider in Inventory Allocation

You must be systematic and data-driven when it comes to inventory allocation.

You must consider:

• Customer demand – This is indicated at the rate at which inventory levels decrease. Forecasting tools can give a better idea about potential demand, factoring in historical data.
• Stock levels – It is imperative to avoid both over and under-stocking so that consumer demand is met, carrying costs are low, there are no stockouts, and perishables are sold quickly.

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• Storage space – Inventory should be stocked as close to where needed as possible, so that it can be delivered speedily; you need to consider available space so as to not overcrowd.
• Work-in-progress – Also has to be considered for allocation by tracking across the supply chain to ensure availability when needed and avoid delays.
• Reallocation – Can be performed to accommodate demand shifts, provided it does not incur heavy cost.

Tranquil can inform you where inventory must be allocated and managed with real-time visibility into inventory. It automates tracking, allocation, replenishment, etc., ensuring inventory is available where and when its needed. Schedule a FREE demo to see how your business can benefit!