This website does not support Internet Explorer. Please, switch to Edge, Chrome, or Firefox browser to view this page.

Learn about IE support
Knowledge

What is Inventory Allocation?

Seo blog inventory allocation blog header v1
Published: Reading time: 9 min
o9 Solutions The Digital Brain Platform
o9 SolutionsThe Digital Brain Platform
Follow on LinkedIn
Published:

Inventory allocation, or stock allocation, refers to the strategic distribution of goods and materials across a company's network. Tailored to meet varying customer demand across different locations, this process ensures that store shelves are consistently well-stocked and online orders are fulfilled promptly and cost-effectively by shipping from nearby warehouses. 

It also enables products to be manufactured quickly and required components and materials to be readily available, while warehouse utilization is optimized for efficient storage capacity.

Inventory allocation is a methodical approach guided by data, aimed at deciding the optimal distribution of inventory to various locations within a company's network. This process is crucial for fulfilling customer demand effectively, beginning with managing production flow at the manufacturing stage to prevent any bottlenecks.

Companies leverage three primary inventory allocation methods: pull, push, and just-in-time, each tailored to address specific operational needs and demands.

When Does Inventory Get Allocated?

Inventory allocation is a continual procedure that requires adaptation based on factors like customer demand, inventory fluctuations, warehouse capacity, and supply chain effectiveness. For instance, if a specific type of designer jeans is abundant in three stores in Florida but nearly sold out in two stores in Maine, it would be logical to redistribute those items to meet demand in the northern region. Inventory management software is utilized to monitor stock levels, enabling decision-makers to assess the optimal distribution.

What Are the Benefits of Inventory Allocation?

The overall expenses associated with inventory encompass more than just the production or purchase costs of goods intended for sale. Costs are tied to ordering, shipping, and warehousing inventory, including economic order quantity considerations, potential revenue losses due to dead stock, stockouts, and inefficient storage usage, as well as labor costs. Effective inventory allocation planning plays a pivotal role in managing these expenses by ensuring that inventory levels are strategically managed across the supply chain to promptly address customer demand. 

Furthermore, having a clear understanding of current inventory levels and future allocation for replenishment purposes is crucial. The savings derived from efficient inventory management can then be reinvested in the business.

In manufacturing, proper inventory allocation ensures that necessary materials are readily available in the appropriate facilities for seamless product production. Waiting for parts during periods of heightened demand can disrupt the manufacturing timeline, resulting in potential revenue losses and dissatisfied customers seeking alternatives.

At the retail level, strategic allocation facilitates expedited shipping and delivery by situating inventory closer to customers, whether in physical stores or nearby warehouses, thereby minimizing delivery times. This aspect holds particular significance for perishable goods, where any misallocation can accelerate the items toward their expiration dates.

In summary, the advantages of inventory allocation encompass:

  • 1.

    Reduced inventory costs
  • 2.

    Optimized stock levels throughout the supply chain
  • 3.

    Enhanced capacity to meet customer demand
  • 4.

    Mitigated manufacturing delays
  • 5.

    Minimized revenue losses
  • 6.

    Improved shipping efficiency
  • 7.

    Reduced delivery times

Inventory Allocation Challenges

In the absence of appropriate technology and systems to monitor inventory levels and customer demand throughout a company's supply chain, the process of inventory allocation devolves into mere guesswork. 

A lack of real-time visibility on inventory can significantly skew decision-making, such as determining storage locations, production quantities, and reorder timings. Failure to accurately anticipate which inventory is earmarked to meet future demand may result in over or under-allocation of inventory in inappropriate sales channels or regions, leading to unnecessary carrying costs.

Even with advanced technology, unforeseeable supply chain bottlenecks, supplier collaboration issues, inventory deficits, or shifts in customer demand can occur; this can disrupt an otherwise efficient inventory allocation process. Natural disasters like earthquakes or tornadoes, for instance, can temporarily halt operations at major manufacturing plants or devastate warehouses holding inventory. It's therefore wise for businesses to proactively establish contingency plans to address contingencies.

Key challenges associated with inventory allocation in the absence of adequate systems encompass:

  • 1.

    Lack of real-time visibility
  • 2.

    Suboptimal inventory-related decision-making
  • 3.

    Inability to forecast future demand accurately
  • 4.

    Misalignment of inventory levels with channels or regions

Methods of Inventory Allocation

Businesses employ various strategies to allocate inventory effectively among their distribution points. These methods are tailored to respond to customer demand, stimulate it, or combine both approaches. An automated inventory management system provides the real-time insight needed to determine which inventory allocation method is appropriate. When companies switch to an automated inventory allocation tool, they can reduce errors and ensure they always work with the correct data.

Pull Allocation

This method hinges on responding to the "pull" of customer demand for products. Essentially, this means how much inventory is dispatched to locations where customer demand justifies its presence. This minimizes excess inventory and keeps storage costs low, though sudden changes in demand might catch a company off guard. Businesses dealing in specialty products or those involved in repairing items that require new parts often rely on pull allocation.

Push Allocation

Contrary to waiting for customer signals, the push model aims to generate product demand to "push" inventory toward buyers. Push allocation depends on accurate demand planning/forecasting models that predict sales based on both internal and external data, including historical trends. For instance, a retailer stocking up on school supplies well before the academic year begins exemplifies the push allocation method. Similarly, manufacturers stocking their warehouses and distribution centers with appropriate inventory levels months ahead of the school season follow this model.

Just-in-Time Allocation

Just-in-time (JIT) allocation combines elements of both push and pull methods to maintain an optimal level of inventory where needed to meet demand. A common JIT strategy among manufacturers involves keeping components and raw materials on hand but initiating production only when customer demand warrants it. Restaurants also adopt this strategy by keeping frozen or unassembled food ready to prepare upon receiving orders. However, JIT allocation carries the risk of supply chain disruptions, as seen during the COVID-19 pandemic. While having accessible safety stock to prevent inventory shortages may mitigate this risk, it may not be feasible for businesses like flower shops.

Guidelines for Effective Inventory Allocation

In the realm of inventory management, a one-size-fits-all approach to allocation does not exist. Every industry boasts its own nuances, while each company grapples with its distinct set of challenges, needs, and available resources to cater to its unique customer base. Therefore, rather than rigid "rules," the following are suggested best practices that can be flexibly adjusted to suit your business requirements.

Analyze Market Dynamics and Regional Demand

Crafting a successful inventory allocation strategy involves aligning inventory levels with customer demand across diverse geographical locations. This means meticulously analyzing market trends, consumer behaviors, regional preferences, and other patterns to inform decision-making. 

Conducting thorough research enables a nuanced understanding beyond mere quantity allocation, incorporating variations in inventory as well. For instance, a retailer specializing in T-shirts might leverage industry insights indicating a higher demand for size large. Consequently, allocating a greater proportion of large-sized T-shirts across all outlets, especially during peak seasons like summer, would be a good idea. Subsequently monitoring stock levels ensures that supply consistently meets demand.

Prioritize Items with Shorter Shelf Lives

In industries dealing with perishable goods such as food, cosmetics, and flowers, inventory allocation prioritization hinges on shelf life and expiration dates. Items nearing expiration should be allocated first to locations with higher sales volumes to mitigate potential financial losses. For instance, grocery stores typically display products with imminent sell-by dates prominently to encourage swift turnover. This principle also applies to "fad" items characterized by short-lived demand.

Embrace Real-Time Data Analysis

Harnessing real-time inventory data across the supply chain is pivotal for informed inventory allocation decisions. By continuously tracking inventory levels and analyzing demand patterns, businesses gain valuable insights that drive allocation strategies. This proactive approach enables timely adjustments based on evolving customer preferences and demand trends. For instance, real-time data facilitates swift inventory relocations to address discrepancies in sales across different locations, ensuring optimal stock turnover.

Automate Allocation Processes

As businesses expand, automating inventory allocation processes streamlines operations, alleviating the burden on employees tasked with manually tracking stock levels across multiple locations. Automation not only reduces labor costs but also minimizes errors associated with manual processes. Additionally, it facilitates efficient order fulfillment, optimizes storage space, and enhances overall profitability by ensuring accurate and timely inventory replenishment.

Incorporating these guidelines into your inventory management framework fosters agility, responsiveness, and efficiency, enabling your business to effectively meet customer demand while optimizing operations.

Considerations for Inventory Allocation

Effective distribution of inventory requires a methodical and data-driven approach, especially given the dynamic nature of customer behavior and regional trends. A robust inventory management system should be capable of adapting to these changes. Several factors need to be taken into account when getting inventory allocated:

Customer Demand

Understanding customer demand is crucial. Analyzing inventory levels and their fluctuations provides valuable insights into customer preferences. Demand forecasting tools utilize historical data and sales forecasts to anticipate future trends and adjust inventory accordingly.

Stock Levels

Balancing inventory levels across the supply chain is essential to avoid financial risks. Overstocking results in higher carrying and labor costs, as well as potential wastage of perishable items. Conversely, understocking leads to stockouts and lost revenue, driving customers to competitors.

Physical Storage Space

The location of inventory within facilities, such as backrooms, warehouses, or fulfillment centers, impacts efficiency. Proximity to demand points enables faster order fulfillment, fostering customer satisfaction and repeat business. Additionally, considering available storage space prevents overcrowding and ensures optimal space utilization.

Work-in-Progress Inventory

Inventory allocation encompasses not only finished products but also partially completed items and production components. Work-in-progress (WIP) inventory, including raw materials and product packaging, must be allocated strategically to prevent production bottlenecks and delays.

Reallocation

Adjusting inventory levels to meet changing customer demand is necessary for financial viability. However, reallocation should be balanced against profitability, as excessive movements may incur additional costs. Evaluating the feasibility of reallocation ensures prudent inventory management practices.

In conclusion, a comprehensive understanding of customer demand, efficient utilization of stock levels and storage space, and strategic allocation of work-in-progress inventory are essential for effective inventory management. Reallocation should be undertaken judiciously to optimize operational efficiency and maintain profitability.

Inventory Allocation - Best Practices by o9 Solutions

o9 is trusted by the world's leading companies. Our Supplier Collaboration software approach excels in providing businesses with actionable insights, allows easy collaboration, and leverages built-in models.

Take the first step to achieve insights into your supplier chain management. Make better decisions based on both data and research.

O9 whitepaper apo wave 2 mockup

Look for the APO replacement that adapts with your business

Today’s businesses demand more than rigid old technology and rightly so. Download our white paper to learn how next-generation platforms are replacing APO

About the author

o9 Solutions The Digital Brain Platform

o9 Solutions

The Digital Brain Platform

o9 Solutions is a leading AI-powered platform for integrated business planning and decision-making for the enterprise. Whether it is driving demand, aligning demand and supply, or optimizing commercial initiatives, any planning process can be made faster and smarter with o9’s AI-powered digital solutions. o9 brings together technology innovations—such as graph-based enterprise modeling, big data analytics, advanced algorithms for scenario planning, collaborative portals, easy-to-use interfaces and cloud-based delivery—into one platform.

Resources

View our related articles, white papers, use cases & videos

article14 min

The Takeaways from aim10x Munich 2024

by Alberto Fabregat
Hero image blog page
article5 min

Supply Chain vs. Logistics

by o9 Solutions
O9 blog what is supply chain and logistics header
article16 min

Day 1 Recap: aim10x digital 2024

by o9 Solutions
Day 1 recap web banner 920x1080px
article8 min

The Takeaways from aim10x Bangkok 2024

by Stijn-Pieter van Houten
Hero image blog page
article6 min

O que é uma Torre de Controle de Supply Chain e por que você precisa de uma?

by o9 Solutions
Ad 2 1
article8 min

What is Replenishment Planning?

by o9 Solutions
O9 blog what is replenishment planning
article8 min

Decision-Maker's Guide: Resolving Last-Minute Questions for Seamless Integration and Adoption

by Stijn-Pieter van Houten
O9 mof blog decision maker's guide resolving last minute concerns for seamless integration and adoption header
article3 min

How o9 Transforms Disparate ERP Systems into Unified Insights

by Stijn-Pieter van Houten
O9 mof blog bridging erp gaps header
article3 min

Empowering Independence: Reducing Life-Long Dependency on Externals

by Stijn-Pieter van Houten
O9 mof blog empowering independence reducing life long dependency on externals header
article15 min

Day 2 Recap: aim10x digital 2024

by o9 Solutions
Day 2 recap web banner 920x1080px
article8 min

What is Multi Echelon Inventory Optimization (MEIO)?

by o9 Solutions
O9 blog what is multi echelon inventory optimization header
article4 min

The Benefits of Moving to a Digital Operating Model

by Stijn-Pieter van Houten
O9 mof blog what are the benefits for moving to a digital operating model header