Inventory Allocation: How Retailers Can Find the Perfect Balance
Retailers face a real conundrum. On one hand, everything from the costs of raw materials to commercial retail space is always getting more expensive. And on the other, customers can quickly check dozens of options for any purchase so retailers must ensure that their traditional brick and mortar stores add value to the overall shopping experience. For anyone looking to minimize operating costs while maintaining margins, inventory allocation is one area that simply cannot be overlooked!
Succeeding in today’s complex omni-channel environment means striving to achieve the perfect inventory allocation across multiple locations at a time when it has never been more difficult or costly. With pressure from customer to provide exceptional choice and availability, how can retailers achieve a balanced inventory allocation across all channels?
Inventory Allocation Explained - Why You Need a Strategy
Put simply, inventory allocation encompasses all of the decisions made around how inventory should be distributed throughout your supply chain. The problem for many retailers is that their network is comprised of a complex mix of centralized and decentralized locations and channels. Consequently, generating and implementing an optimal inventory allocation can be a truly mind-boggling exercise.
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. This is important because even if you have dozens of retail stores, the allocation of available inventory to any one of them can have a profound impact on overall sell-through rate and waste.
What Does Ineffective Allocation Strategy Look Like?
Before we cover how to determine the best strategy for your business, let’s first take a moment to look at what bad strategy - or worse, no strategy - looks like. (Note – If any of this hits too close to home, you should give us a call!)
When allocation strategy is not well aligned with overall business strategy, this can have a huge impact on the performance of the business as a whole. Some of the resulting issues are very visible, such as empty shelves at some locations while others have cluttered aisles and backrooms bursting with stock. 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.
Tell-Tale Signs of an Effective Vs Ineffective Allocation Strategy
Optimized Allocation Strategy Ineffective Allocation strategy
😊 Consistently high levels of availability ☹ Cluttered stores
😊 Minimized inter-store transfers ☹ Excess stock across the chain
😊 Maximum product sell-through ☹ Availability issues across online channels
😊 Days of stock on hand minimized ☹ High rate of in-store stockouts
😊 Excellent customer satisfaction ☹ High rate of markdown
Inventory Allocation Rules: What Parameter Should Be in Place?
Every business is different. As a result, the parameters for 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 minimize supply chain costs.
However, in industries where the demand per location is highly uncertain, e.g. fashion, 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 DCs to stores
• Available warehouse space at the DC
• Available shelf space in-store
• Cost to re-distribute stock
• Level of available inventory
Inventory Allocation in a Multi-Channel Environment
Though all retailers are different, there are a number of points to consider so that your inventory allocation will satisfy both the demands of the customer as well as deliver value to the business.
1. Get your allocation right first time, every time
For many retailers, the initial allocation causes the biggest headache. This is not surprising given that a poor initial inventory allocation is one of the most common avoidable causes of obsolescence and waste. 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. So, while it makes sense to allocate these to stores, what about extremely large and small sizes?
Since these products are statistical outliers demand for them at any given store is likely to be far lower, and therefore the risk of excess and obsolescence is far higher. Consequently, it makes more sense to allocate outlier products to a centralized location in order to fulfill demand via the webshop or push to stores when required.
2. Presentation is everything
When it comes to the initial allocation, less is more. That said, there is always a minimum inventory amount that should be allocated per store. The goal here is to provide your stores with a sufficient amount of presentation stock to launch a new product 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. Presentation stock is typically driven by the planogram in place, which is why we highlighted the importance of communicating your allocation strategy throughout your company at the beginning of this piece. In this case, it’s vital that supply chain teams are well aligned with the visual merchandising team to minimize the risk of excess and obsolescence.
3. Make automated replenishment work for you
As stated in Point 1, it is not advisable to allocate all of your inventory straight away. Instead, retailers should rely on their replenishment processes to regularly top up in-store inventory levels. But how do you know when it’s the right time reorder for a new item?
Establishing automated replenishment rules for new items can be tricky given the dearth of item-specific historical sales data. Instead, set initial automated reorder quantities at a level equivalent to similarly selling items at that location, and institute weekly manual reviews. By doing this, you can be assured of a specific minimum inventory level, with the option to order more as needed using the manual review. As adjustments are made after the roll-out, the review time-frame can be pushed to bi-monthly and then monthly once more data is available. While this process is more labor intensive than standard automated replenishment it works to ensure that stock is allocated correctly while also providing that reassurance that a base level of product will always be available.
Businesses must grab every opportunity they can to improve margins. By implementing a cohesive allocation strategy, retailers can realize increased sales from levels of availability across the entire supply chain.
Slimstock has been helping companies like yours lower inventory costs while increasing customer satisfaction for 25 years. Our inventory management software is used by over 900 customers worldwide to free up capital and simplify the ordering process. Chat with one of our friendly customer service reps today to learn how we can help optimize your inventory.