Inventory allocation: How can retailers find the perfect balance?

Retailers face a real conundrum. On one hand, everything from the costs of raw materials to the costs of commercial retail space is increasing dramatically. However, on the other hand, customers are becoming savvier than ever and will simply not accept any increases in price. As retailers look to minimise operating costs to maintain margins, inventory allocation is one area that retailers simply cannot afford to overlook!

Ultimately, to survive in retail, business leaders must do whatever they can to drive efficiencies across every aspect of their business. However, as customers increasingly exploit the convenience of online shopping channels, retailers now must work harder than ever to ensure that their traditional bricks ‘n’ mortar stores still add value to the overall shopping experience.

What is inventory allocation?

In essence, inventory allocation relates to all decisions made around how inventory should be distributed across the chain.

The problem for many retailers is that their network is comprised of a complex mix of centralised and decentralised locations and channels. Consequently, trying to determine an optimal inventory allocation is a truly mind-boggling exercise!

However, given the importance of availability at all locations (e.g. stores, DCs, distribution hubs & fulfilment centres) this is an area which you can not afford to overlook. Furthermore, when you consider the cost of getting an allocation wrong, the impact is huge!

Do you need a retail allocation strategy?

In complex retail environments, with many warehouses, stores and multiple e-commerce channels, it is vital that the retail allocation strategy is both well considered and communicated effectively across the wider business. After all, the store allocation for the available inventory could have a profound impact on the overall sell-through rate and waste.

Allocation in retail is all about determining the right service levels per location and balancing inventory accordingly. However, an effective retail allocation strategy must take into account local demand factors and customer purchase behaviour at every location in order to determine the optimal level of inventory to push to stores. The result is an optimal store allocation which maximises sales through increased availability while minimising the risk of waste!

What does an effective inventory allocation strategy look like?

By distributing inventory effectively across the chain, retailers ensure the right stock is available at the right time, at the right location. Essentially, an optimal inventory allocation will ensure that customer’s satisfaction is maximised and the opportunity to profit is fully exploited. However, what if the inventory is not allocated correctly?

If the allocation strategy is not well aligned with overall business strategy, this can have a huge impact on the performance of the whole business. Some of the resulting issues are very visible such as empty shelves in some locations while other locations suffer from cluttered aisles and backrooms bursting with stock. However, a poor allocation can also have a profound impact on sales and margins as the business is hit with avoidable supply chain costs and missed sales opportunities.

Inventory allocation rules: What parameters should be in place?

Every business is different. As a result, the parameters for an effective stock allocation must be built with the intricacies of the operation in question. For example, in environments where demand is steady and easy to predict, allocating all the stock may be the best way to minimise supply chain costs.

However, in fashion environments, for instance, where the demand per location is highly uncertain, allocating 100% of the available inventory on day one could be a risky decision. Instead, it may make sense to allocate 50% of the available inventory to stores in the first instance and then allocate the rest to the best performing locations further down the line. Therefore, the inventory allocation rules must reflect this.

When determining inventory allocation rules, the following are examples of things which business leaders may want to consider:

• The risk of stock outs Vs. the risk of waste
• Ease & speed of distributing inventory from DC to stores
• Available warehouse space at the DC
• Available shelf space in-store
• Cost to re-distribute stock
• Level of available inventory

How can you avoid the pitfalls of poor inventory management?

The factors and priorities for making an inventory decision will differ from retailer to retailer. However, there are a number of principles that all business leaders should consider in order to ensure the inventory allocation will satisfy both the demands of the customer as well as deliver value to the business!

1. Get the allocation right first every time

For many retailers, the initial allocation causes the biggest headache. This is not surprising given that one of the most common avoidable causes of obsolescence and waste is a poor initial inventory allocation. When rolling out a product to stores, the temptation is to allocate all inventory from day one. However, there is little point in allocating products to a store where they will never sell through.

Take for instance the inventory allocation of women’s shoes: demand will always be higher for size 6 shoes. As a result, it makes sense to allocate these to store. But what about extremely large or small sizes?

Demand for these sizes at a specific store is likely to be far lower and therefore the risk of excess and obsolescence is far higher. Consequently, it makes more sense to centralise the allocation of extreme sizes in order to fulfil demand via the webshop or push to stores when required.

2. Presentation is everything

When it comes to the initial allocation, less is more. However, there is always a minimum limit of inventory that should be allocated to stores in the first instance. The goal here should be to ensure that the stores have sufficient amount of presentation stock to launch a new product in-store as well as cover demand until the inventory can be replenished.

However, there is still a risk that the level of presentation stock is excessive. Given that presentation stock is typically driven by the planogram in place, its vital that supply chain teams are well aligned with the visual merchandising team to minimise the risk of excess and obsolescence.

3. Make automated inventory management work for you

As highlighted above, it is not advisable to allocate all the inventory straight away. Instead, retailers should rely on their stocking processes to regularly top up in-store inventory levels.
When it comes to stocking, it’s vital that retailers must ensure that the right items, sizes, and colour combinations are stocked in the right location. After all, without consistent levels of availability throughout the sales window, customers will have little choice but to look elsewhere!

However, replenishment in retail environments requires careful timing. If items are replenished too soon, this can result in a surplus at one location while leaving another short stocked further down the line. Equally, if items are replenished too late in the season, these items may not sell through in time and thus, result in avoidable markdowns. An effective replenishment strategy achieves the perfect balance between avoiding stock-outs, minimising excess and achieving high levels of customer satisfaction.

Inventory allocation is a multi-channel environment

Given the current retail climate, retailers must grab any opportunity they can to improve margins. As one of the main causes of excess and waste, optimising inventory allocation processes will undoubtedly help retailers to minimise avoidable costs. Furthermore, by rationalising the decision process, retailers will also benefit from the increased sales that results from achieving more higher levels of availability across the entire chain!

What steps have you taken to optimise your approach to allocation? What impact has this had on your business?