Retailers face a real conundrum. On one hand, everything from the cost of raw materials to the cost of commercial retail space is increasing dramatically. On the other hand, customers are becoming savvier than ever and will simply not accept any increases in price. As businesses look to minimise operating costs in order to maintain margins, inventory allocation is one area that they 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.
How can you achieve the optimal allocation?
Put simply, for retailers that exist in today’s complex omni-channel environment, achieving the perfect inventory allocation across a multitude of locations has never been more difficult … or costly!
With pressure from customers to provide exceptional choice and availability, how can retailers achieve a balanced inventory allocation across all channels?
In this article, we explore how you can adopt a more strategic approach to allocation. The secrets we reveal have helped our customers to attain significant improvements in on-shelf availability, while minimising risk. 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 (eg stores, DCs, distribution hubs and fulfilment centres), this is an area which you cannot afford to overlook. Furthermore, when you add in the cost of getting an allocation wrong, the impact can be 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 effect 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 appropriate level of inventory to push out 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 satisfaction is maximised and the opportunity to profit is fully exploited.
What happens 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 clearly visible such as empty shelves in some locations, while other locations suffer from cluttered aisles and backrooms “bursting at the seams” with stock. However, a poor allocation can also have an immense bearing on sales and margins as the business is hit with avoidable supply chain costs and missed sales opportunities.
The tell-tale signs of an optimised vs ineffective allocation strategy
Optimised Allocation Strategy
Ineffective allocation strategy
😃 Consistently high levels of availability
😭 Cluttered stores
😃 Minimised inter-store transfers
😭 Excess stock across the chain
😃 Maximum product sell-through
😭 Availability issues across online channels
😃 Days of stock on hand minimised
😭 High rate of in-store stock-outs
😃 Maximised customer satisfaction
😭 High rate of mark-down
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 of 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, business leaders may want to consider:
The risk of stock outs vs the risk of waste
Ease and 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 are unlikely to sell through.
Take for instance the inventory allocation of women’s shoes. Demand will always be higher for size 6 shoes, and as a result, it makes sense to allocate these to stores.
But what about extremely large or small sizes? Demand for these at a specific store is likely to be far lower, and therefore the risk of excess and obsolescence is far higher. Consequently, it makes sense to centralise the allocation of extreme sizes, and to fulfil demand via the webshop or to push out to stores as and 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 to cover demand until the inventory can be replenished.
There is still a risk that the level of presentation stock is excessive, and given that presentation stock is typically driven by the planogram in place, it is 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 of 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 is vital that retailers ensure that the right items, sizes and colour options 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.
What is more, 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 mark-downs. An effective replenishment strategy achieves the perfect balance between avoiding stock outs, minimising excess and achieving high levels of customer satisfaction.
Strategies for effective inventory allocation
The importance of inventory allocation lies in finding the right balance between customer satisfaction and financial efficiency.
If you allocate too much inventory to a particular channel, you run the risk of excess stock and all the associated costs that this entails. For example, inventory expenses, the cost of additional storage capacity and the risk of obsolescence. On the other hand, if you allocate too little inventory, availability can suffer, leading to lost sales and customer dissatisfaction.
To achieve this balance, you need a dynamic allocation strategy that adapts to fluctuations in demand at the points of sale.
Inventory allocation in e-commerce environments
Below are 5 of the most effective allocation strategies:
1. Universal allocation rules
This is the simplest, and perhaps also the least effective, method. Only the most important items will have a differentiated allocation to stores, depending on where they generate the most value and where they are most needed. The rest of the SKUs are distributed equally to each location.
Such a simple strategy is, predictably, not efficient and causes stores to be supplied with the wrong amounts of stock.
2. Tiered Allocation
This strategy involves grouping the stores by importance resulting in groups “A”, “B” and “C”. The most important, “A”, are the ones that sell the most. Whereas, the “C” stores are the ones that sell the least.
This can be a problem since, if a “C” store improves its performance, it will not be able to sell more because it simply does not have enough stock. In addition, this method does not take into account the fact that a certain item can be sold more efficiently in a “C” store than in an “A” store.
3. Allocation by store groups
As in the previous strategy, stores are grouped. But rather than by sales, they are grouped by format.
Store clustering is a more refined approach than tiering. Retailers assign products to stores with common characteristics. For example, format grouping might include flagship locations, outlets and popups.
However, you may prefer to group them by geographic location, treating stores in the south and those in the north differently. But what if a flagship store in the north has more in common with local outlets than an equivalent flagship store in the south and vice versa?
As you can tell, the problem here is that it is often difficult to define a store by a single characteristic.
4. Demographic-based allocation
This strategy may make sense in specific cases where the demographic makeup of a store environment is very particular. For example, in the case of a clothing store located near a college campus, it may make sense to allocate more hoodies and sportswear to meet the demands of the typical customer.
5. Demand-driven allocation
Often this is the most efficient allocation strategy as it is based on the demand forecast of each point of sale. If the forecast is correct and the operation works correctly, the result is that the stock is distributed appropriately among all the stores, achieving the desired level of service, but without excess inventory.
However, this strategy is also the most complicated and complex, and to carry it out effectively, it is wise to have the support of specific technology.
Inventory allocation in a multi-channel environment
So far we have talked about inventory allocation strategies in the context of a traditional retail environment, where all sales are made in a physical store. However, the reality today is more complex. With more sales channels than ever before, we should also consider how your approach to inventory allocation should be adapted to support a multi-channel environment.
Nuances of inventory allocation in e-commerce
Some of the specific inventory allocation challenges of selling through online channels include:
Typically, online channels allow for a far broader assortment when compared with a physical store. Therefore, the product allocation must be made taking into account the extensive catalogue of the online store. For this reason, e-commerce companies, especially pure players, often centralise inventory in one of two large distribution centres.
Differentiated strategies per channel
A retailer can sell its products on the internet through multiple channels, their own website, third-party marketplaces, and/or directly via social networks to name but a few. Each channel may have different specificities. For example, it is possible that the level of service desired is higher for your own website compared with a third-party store. Therefore, the allocation strategy should be adjusted accordingly.
Geographically diverse customer base
The geographical scope is much greater and may mean you serve customers at a regional, national, or even international level. This may mean that you need to set up your network accordingly to fulfil customer orders from remote places.
Returns in e-commerce are frequent, and this must be considered, since space will be needed in the warehouse to receive and manage them.
Nuances of inventory allocation for Click and Collect operations
The hybrid model for Click and Collect combines online purchases with instore collection. It inevitably has some specific peculiarities:
Unlike pure play e-commerce where the inventory is centralised, in the case of Click and Collect, a certain amount of inventory may need to be held at the location. Furthermore, space within the store may need to be reserved to process this type of order.
The fulfilment of Click and Collect orders requires an efficient process to ensure a smooth customer experience. When allocating inventory, the constraints around personnel, storage space and resources should be considered.
Seamless integration between the online ordering platform and the in-store point-of-sale system is crucial for accurate Click and Collect inventory allocation.
Final thoughts on inventory allocation
Given the current retail climate, retailers must grab every 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 result from achieving 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?
Inventory allocation FAQs
What is inventory allocation?
Inventory allocation refers to the process of allocating and distributing a company’s available inventory through its distribution network. Inventory allocation is all about determining how much product will be allocated to each location, such as warehouses, retail stores or distribution centres, in order to efficiently meet customer demand.
What is the difference between inventory allocation and replenishment?
Inventory allocation refers to the process of allocating and distributing stock throughout the supply chain. Replenishment is the process of restocking inventory at a given location. It involves determining when, and in what quantity, products should be shipped from a central location, such as a warehouse or distribution centre, or ordering from a supplier to sales or consumption locations. The goal of replenishment is to maintain adequate inventory levels to meet ongoing customer demand.
What are the benefits to the business of efficient inventory allocation?
The benefits of good inventory allocation include:
Increased customer satisfaction by correctly allocating stock, thereby ensuring that products are available at the right time in the right locations.
Maximised utilisation of storage space.
Reduction of operating expenses, such as transportation, by ensuring that inventory is allocated correctly in the first instance. This makes it possible to reduce and optimise deliveries and avoid returns to the distribution centre at the end of the season or due to obsolescence.
Increased agility and flexibility. Thanks to the strategic distribution of inventory, a better adaptation to fluctuations in demand is achieved
What difficulties must be overcome to ensure effective inventory allocation?
Some of the difficulties that businesses encounter in their inventory allocation processes are:
Lack of visibility over demand in the different locations.
Complexity in the supply network. The more sales locations, distribution centres and commercial partners on whom you depend, the more complicated the operation becomes.
Limited storage capacity in some of the locations.
Lack of data or misinterpretation. Without reliable information, an effective stock allocation cannot be carried out.