How should retailers manage limited inventory this holiday season?

There have been countless articles and reports about supply chain challenges that companies across multiple industries have experienced this year, and it’s likely to continue for the foreseeable future. I’m not going to dwell on that, as I think we’ve all come to terms with our collective reality. Instead, I’d like to share a perspective on what to do about it.

In client conversations, the following questions are common:

We know we’re not going to have enough inventory during the holiday season. How do we make the best decision about where to allocate the limited product we have?

This is a hard question to answer because there are so many variables that influence the allocation of limited inventory across stores like profitability, customer service, brand risk and more. For every business or product line, the importance of each of these variables is weighted a little differently. As a result, a simple heuristic is not powerful enough to produce a truly optimized (and achievable) allocation recommendation. 

Let’s say retailers were solely focused on profitability – it would be likely the stores closest to the distribution center, or to the supplier, would be fully stocked while the stores further away with a higher cost to serve, would fall further and further down the allocation list. However, imagine we’re talking about milk at a grocery store. Every retailer has a list of “A” or “core” items that they must have in stock to protect the customer experience and their brand. As a result, it’s necessary to factor product importance or hierarchy into the decision matrix. 

Each retailer will have its own criteria for determining the highest priority variables or factors, which leads into the next common question:  

What are a few variables we should think about when allocating a limited product?

• 1.

  Legal Obligations – Review your contracts, if applicable, and work with your legal counsel to ensure your allocation strategy doesn’t violate any agreements. 

• 2.

  Profitability – This is a function of price and cost, so it’s more nuanced. However, the end goal is to maximize profitability which is usually the objective function of this complex equation. It’s important to get down to a granular level (Store/SKU) with visibility into the cost to serve at each location because the goal is to completely fulfill demand at the most profitable locations while only supplying the minimum required amount of product to the least profitable locations. 

• 3.

  Brand Risk/Customer Experience – These two go hand-in-hand and are an important part of the optimization. Retailers should identify which products are “A” products and should be stocked in a store, no matter what. Imagine if customers walked into a Costco and they didn’t have any rotisserie chicken (this is a core product offering driving customers to Costco stores) or milk, or if customers opened their Domino’s app only to discover their local store was completely out of pizza. In these scenarios, the long-term loss and brand damage might not outweigh the sub-optimal allocation of products purely based on profitability.

There are other variables that must be considered like the demand forecast (not history), supplier commitments, lead times, shipment constraints, shelf life, etc.

What should we look for when evaluating technology solutions that can build optimized allocation plans? 

• A fully integrated platform
  When it comes to managing limited inventory, it’s critically important that your right hand (allocation optimization) knows what your left hand (Replenishment plans, inventory visibility, etc.) is doing. An allocation plan that isn’t achievable from a replenishment standpoint isn’t productive. 
• Automatic allocation
  I touched on this above, but the allocation plan should be based on forecasts, not historical demand. In addition, look for a platform with the ability to seamlessly integrate LP or Optimization Solvers. It’s imperative that the automatic allocation plans be fully achievable and adhere to all rules set by the business (see above: legal obligations, brand risk, etc.)
• Omnichannel capabilities
  Prioritization rules should automatically align with your commercial strategy across channels.
• Logistics rules and constraints
  This will help connect the right hand and the left hand. If your supply chain uses cross-docking, vendor-to-store deliveries, multi-pack aggregation, etc., it’s important that those factors be included in your allocation plan. 
• Flexible network modeling
  Change is constant. The platform optimizing your allocation plans should be able to seamlessly adjust for new stores, stores closing, new channels, etc. 

Supply chain challenges aren’t going anywhere, but there are tools and platforms out there that can help you and your organization navigate the complexity more efficiently, with more optimal solutions. Find a technology solution that can incorporate the nuances of your supply chain while keeping up with the pace of your business, and maybe give you a little bit of time back.

About the author

Thomas Gonzalez

Supply Chain Improvement Expert

For the past 10 years, Tom has focused on supply chain improvement. He leverages both his experience as a supply chain practitioner at Eastman Chemical, Michelin Tires and Bayer as well as the insights gathered as a BCG consultant at o9 where he helps our retail and CPG customers understand and execute on the art of the possible. You can learn more from Tom by reading his blogs or connecting with him on LinkedIn.