One of the advantages of beginning an eCommerce business is the limitless growth potential. If you sell a high-demand product, chances are you can grow into new markets. But how will you track and manage your inventory levels across sales and distribution networks as your order volume increases?
Inventory Allocation is the answer. It reduces storage costs, speeds up order fulfillment, and increases profitability. This article is your comprehensive guide to inventory allocation, including the factors to consider when making inventory-related decisions and inventory allocation strategies.
What is Inventory Allocation?
Inventory allocation, in its most straightforward meaning, is the art and science of assigning the appropriate to the appropriate location and at the proper time. The goal is to have the right effect in stock when and where the customer wants it while minimizing costs.
Based on real-time tracking and analysis of inventory levels and customer demand estimates, inventory allocation opens the way for supply chain efficiency and the various cost savings that come with it.
Benefits of Inventory Allocation
Inventory allocation strategies offer many benefits that can impact a company’s bottom line. Some of the most important benefits are:
1. Reduced inventory costs
By allocating inventory, companies can avoid overstocking inventory at any location. Reducing inventory levels also reduces the carrying costs associated with that inventory.
2. Improved customer satisfaction
When customers can’t find their desired products, they may go to a competitor. By using inventory allocation strategies, businesses can be sure that the products customers want are in stock and available.
3. Stock levels optimize throughout the supply chain
Businesses can avoid stockouts and overstock by allocating inventory. It leads to significant cost savings because businesses only have the stock they need on hand when they need it.
4. Reduced manufacturing delays
When demand is low, there’s no need to produce more products than necessary. By allocating inventory efficiently, businesses can avoid having too much stock, leading to production delays.
5. Reduced revenue losses
By allocating inventory efficiently, businesses can avoid having too little list, leading to lost sales and revenue.
6. Increased shipment speed
When inventory allocates efficiently, products can be shipped faster because they don’t have to move around as much.
7. Shortened delivery times
When inventory allocates efficiently, businesses can avoid moving products long distances. It leads to shorter delivery times and happier customers.
Inventory Allocation Methods
Businesses can choose from several strategies to best allocate inventory throughout their distribution. Here are some basic strategies:
1. Pull Allocation
The pull inventory control system begins with a customer order. Companies using this method produce enough merchandise to fill consumer demand. For example, if a product sells ten units daily, the company will make ten of those units daily.
This method is beneficial because it reduces the amount of inventory a company needs to keep on hand. Since manufacturing depends on actual customer orders, it also decreases the necessity for forecasting.
2. Push Allocation
The push inventory control system involves anticipating inventory requirements to match consumer demand. Companies must determine which products customers will purchase and the number of goods they will buy.
Materials Requirements Planning, or MRP, is an example of a push system. MRP combines financial, operational, and logistical considerations. It is a computer-based data system that manages scheduling and ordering.
3. Push-Pull Allocation
Some businesses have developed a push-pull inventory control system that incorporates the benefits of both the push and pull strategies. The push-pull approach is also known as the lean inventory strategy. It requires a more precise sales forecast and adjusts inventory levels based on actual sales of items.
The goal is to stabilize the supply chain and reduce product shortages, which could lead to customers shopping elsewhere. Planners employ sophisticated software to create guidelines for managing short- and long-term production needs with the push-pull inventory control system.
4. Manual Inventory Allocation
Manual inventory allocation occurs when an eCommerce business manually maintains and manages its inventory by using physical inventory ledgers or spreadsheets and manual data to make decisions on the physical distribution of merchandise.
The manual method, on the other hand, might be inefficient, error-prone, and time-consuming. Furthermore, as the business grows, it becomes increasingly difficult to scale using this strategy.
5. Tech-enabled inventory allocation
Tech-enabled inventory allocation happens when eCommerce organizations invest in technology to track and manage inventory throughout an inventory network easily.
Such allocation is done in real-time using credible data to make correct and intelligent decisions on physical inventory distribution.
This tech-enabled inventory allocation saves time, is based on insights, and is simple to implement. However, access to such powerful technology is too expensive.
Challenges of Inventory Allocation
Inventory allocation becomes a guessing game without the appropriate technology and processes to track inventory levels and consumer demand across a company’s supply chain. Here are the challenges of inventory allocation without the right system.
- Inadequate real-time visibility: The inability to see inventory levels in real-time leads to stockouts, overstocking, and lost sales.
- Poor inventory-related decision-making happens when organizations don’t access the correct data.
- Inability to determine future demand: This results from not understanding past buying patterns.
- Relying on manual processes can lead to errors and inefficiencies that cost the company time and money.
Not understanding the inventory cost includes the opportunity cost of not having a list available when consumers are ready to buy and the cost of holding excess inventory.
Factors to Consider when Allocating Inventory
Not every business sells through various channels, stores inventory in multiple warehouses, or has the same number of SKUs. It means that all company’s inventory management requirements are unique.
Here are some factors related to inventory allocation to keep in mind:
Inventory Demand
Demand forecasting is one of the most successful methods for allocating stock and meeting demand across distribution centers and channels.
Businesses need to consider current and future demand to maintain optimal inventory levels. It’s done by understanding consumer buying patterns and using that data to predict future direction.
Availability of inventory
A critical aspect of the order fulfillment process is ensuring that products are close to your customers’ shipping addresses. Keeping track of inventory availability guarantees that you don’t encounter problems during the fulfillment process.
As you expand into new markets and distribution channels, implementing technology to track inventory will help you save time and build a more efficient supply chain.
Allocation rules
Businesses should evaluate their inventory strategy and the sort of inventory they have on hand when allocating inventory. Inventory allocation should complement your whole inventory management system, whether FIFO, LIFO, or something else.
Lead Time
The time it takes for inventory to reach its destination is known as the lead time. Consider this while allocating the list so stock arrives on schedule and in the correct area.
For example, if you’re assigning goods to a brick-and-mortar store, you’ll have to deal with lead time from your supplier. If you’re also trying to satisfy demand in your online store, you’ll need to include both the lead time from your supplier and the lead time required to get the goods to the end user.
Inventory Data
Reasonable inventory allocation is impossible without real-time, accurate inventory data. Knowing the ins and outs of your inventory is crucial to keeping track of what you have, where it is, and how much is available for sale. This kind of accuracy is only feasible with automated inventory management software.
Availability of Warehouse Space
It is essential to assess warehouse space availability and pricing. Some firms store merchandise and fulfill customer orders from home until all available space depletes.
In this case, working with a competent 3PL to keep your goods at one or more fulfillment centers close to your customers is more effective. Storage charges typically range from per item or SKU to a flat fee for each shelf used or even per square foot of the storage fulfillment center.
Customer Segmentation
Businesses should consider their client categories when allocating inventories. Customer location, customer type, and buy frequency are all examples of this. For example, if you offer perishable goods, you should give stock to areas where clients are more likely to acquire them.
If you offer non-perishable goods, on the other hand, you might want to explore allocating inventory based on consumer location to reduce transportation costs.
Sales Data
Use sales data when allocating inventory so businesses may ensure they are distributing product to the locations where it is most likely to sell. It covers inventory turnover, consumer demand, and channel sales.
Transportation and Storage Cost
Remember to factor in the cost of shipping and handling when calculating your inventory costs. It will help businesses save on inventory allocation costs in the long run. Allocating inventory to a specific channel may satisfy client demand but also entail expenditures that eat into your margins.
For example, allocating inventory to a physical store may require paying for inventory storage at that location and labor hours at the store. However, if the stock does not sell rapidly enough, you may pay inventory-carrying expenses that exceed sales income.
Returns
Customers may return inventory for various reasons, including broken goods, incorrectly dispatched items, or simply changing their minds. When allocating inventory, businesses must consider the possibility of returns and have the plan to deal with the returned merchandise.
Examples include:
- Setting aside inventory to cover projected returns.
- Engaging with suppliers on return policies.
- Partnering with a returns management business.
Seasonality
Seasonality has the most significant impact on eCommerce, particularly Q4 buying patterns. Many businesses experience fluctuations in demand due to seasonality. It could be due to:
- Weather changes
- Holidays
- Other annual events
When allocating inventory, businesses should consider seasonality to ensure they have enough stock to meet customer demand during peak periods.
Inventory Allocation Strategies
Businesses can use various inventory allocation strategies to distribute their products across channels. The most common are:
Equal or universal Allocation
Under this strategy, businesses allocate an equal amount of inventory to all channels regardless of customer demand or sales data. This approach is simple and easy to implement, but it may not be the most efficient use of resources.
Tier-Based Allocation
Under this strategy, businesses divide their inventory into tiers based on customer demand, sales data, or channel profitability. They then allocate a more significant portion of merchandise to higher-level channels.
Cluster-based Allocation
Store clustering is a more advanced approach than tiering. Retailers allocate items to stores that have similar features. Format clustering, for example, divides flagships, outlets, and popups into separate categories.
On the other hand, climate clustering would treat southern and northern supplies differently. The problem is that a single property cannot define a store. Northern flagship stores may be more similar to local outlets than southern flagships.
Demographic-based Allocation
Another subtle method makes use of the demographic trends of each store. Apparel retailers, for example, can bias allocations to represent younger populations in outlets near universities.
For this strategy to work, retailers must maintain their finger on the pulse of demographic trends. Being taken off guard by a change, such as the transition away from on-campus learning, will cause their allocation decisions to throw.
Demand-Base Allocation
The drawback with these tactics is that they rely on top-down classifications that do not represent how customers in each store buy. When client demand dictates their selections, retailers make the best allocations.
The appropriate Allocation is the number of items required by each retailer to meet its unique consumer demand – no more and no less. Demand-based Allocation is the most accurate of these allocation systems. However, it is also the most difficult.
Inventory allocation best practices
Review your inventory allocation strategy often to make sure it matches your goals. They should also consider the following best practices:
Centralize Your Inventory Management
If a business sells through multiple channels, it’s essential to have a centralized inventory management system. It will give companies visibility into their inventory levels and help them make more informed allocation decisions.
Inventory centralization is crucial for inventory allocation as well as overall business health. It not only makes tracking inventory levels and sales data easier but also makes it easier to allocate goods across multiple channels.
Using ABC Analysis, Classify Your Inventory
ABC analysis is a method for categorizing your inventory from most important to least important. Here’s what an ABC analysis would look like in practice:
- A Items: These are your best-selling products or the items with the highest profit margins.
- B items: These are your middle-of-the-road products. They don’t sell as well as your A items, but they’re not duds.
- C items: These are your slow-moving products or the items with the lowest profit margins.
You can make better decisions about managing your resources if you categorize your inventory, allowing you to optimize storage space and streamline order fulfilment.
Establish Inventory Key Performance Indicators (KPIs).
Inventory KPIs assess your performance in a particular area over a period toward a specific goal. They help to avoid guesswork by setting clear goals for each week, quarter, or year. You’ll have the data you need to make intelligent, strategic business decisions with them.
Here are six inventory KPIs you should focus on:
- Inventory turnover: This KPI measures how often your inventory has been sold and replaced over a set period.
- Days inventory on hand (DIO): This KPI measures how long it takes to sell your merchandise.
- Gross margin: This KPI measures profitability by deducting the cost of goods sold from your overall revenue.
- Stockout rate: This KPI measures the percentage of time that an inventory item is out of stock.
- Orderfill rate: This KPI measures the percentage of orders filled on time.
- Perfect order rate: This KPI measures the percentage of orders filled entirely and correctly.
Improve Your Pick and Pack Processes
Your order picking and packing process directly impact your inventory levels. If these processes are inefficient, it will lead to errors, resulting in inventory inaccuracies. Inefficient processes will also lead to higher labor costs and longer order fulfillment times.
To streamline your pick-and-pack processes, consider using pick-to-light technology or barcoding. These solutions can help to improve accuracy and efficiency.
Types of pick and pack processes:
- Batch picking: In batch picking, orders are grouped and picked at once.
- Wave picking: Wave picking is similar to batch picking, but orders pick in waves or batches throughout the day.
- Zone picking: Zone picking is a pick-and-pack process where orders assign to specific picking zones.
Set up Automatic Reorder Alert
You may set up automatic alerts in a decent inventory management system to notify you when inventory levels exceed a certain threshold. It takes the guesswork out of inventory selection and guarantees that stockouts never catch you off guard.
A reorder point formula indicates when you should order more stock – when you’ve reached the lowest level of inventory you can support before needing more. You may avoid being a victim of market fluctuations by employing a tried-and-true mathematical equation to assist you in consistently ordering the proper quantity of stock each month.
It is known as a reorder point formula.
You can use the following reorder point formula:
(Average Daily Unit Sales x Average Lead Time in Days) + Safety Stock = Reorder Point.
Maintain Safety Stock
The term “safety stock” refers to inventory maintained on hand to meet unexpected surges in demand. Because the list is frequently unpredictable, having a safety stock is essential. Due to supplier concerns, you may see an unexpected rush in orders, or your lead time may be longer than usual.
Safety stock is a tricky business. Too much product on hand leads to dead stock, while not enough development on hand leads to stockouts.
Use Batch-Tracking
Batch-tracking is keeping track of items by their production batch or lot number. This information can help identify the date and location of production and how many things were in the collection.
Optimize your Inventory Turnover Rates
The goal is to keep your inventory levels as low as possible without jeopardizing customer satisfaction. To do this, you need to understand your inventory turnover rates well.
Inventory turnover measures how often your inventory has been sold and replaced over a set period. The formula for inventory turnover is:
Inventory Turnover = The Cost of Goods Sold / The Average Inventory
A low inventory turnover rate means you are not selling your product fast enough and you are investing too much money in inventory. A high inventory turnover rate means you are selling your product too fast and may run into stockout issues. The ideal inventory turnover rate will vary from industry to industry.
Streamline your Stocktake
Streamlining your stocktaking process – the procedures you take to count inventory – will help you reduce the likelihood of your workers making costly errors. A well-organized stocktaking procedure will contain all the strategies necessary to keep your workers motivated and focused while uncovering anomalies and errors.
Use Customer Segmentation
The technique of splitting your customer base into groups based on shared qualities is known as customer segmentation. By understanding your customer segments’ different needs and buying habits, you can tailor your inventory to meet their needs better.
This process will help you make more informed decisions about what products to stock, how much of each product to keep in stock, and when to reorder.
Conduct Regular Inventory Audits
Regular inventory audits will help organizations track their inventory levels and ensure that inventory allocates correctly. Audits are a hassle. We understand. However, they are essential for inventory management.
Furthermore, you do not have to shut down your entire operation to audit your warehouse. Use cycle counting to inventory a small portion of your warehouse at a time. It will reduce inconvenience to your process while yet assuring inventory accuracy.
Work with a third-party logistics Provider.
A third-party logistics provider (3PL) is a business that supports businesses with inventory management and fulfillment. Businesses effectively outsource their whole logistics process to a third party.
An example of a third-party Logistics provider is Hopewell Solutions, they offer complete Chain Solutions supporting Traditional and Omni-Channel fulfillment.
Try Push inventory Allocation
Push inventory allocation is a stock management strategy where inventory allocates to meet customer demand. In other words, businesses using push inventory allocate their product based on customer orders rather than waiting for customers to order and then fulfilling those orders.
Push inventory allocation is a proactive strategy to ensure that stores have the product(s) customers want when they need it.
Reduce your inventory
The goal is to keep your inventory levels as low as possible without jeopardizing customer satisfaction. To do this, you need to understand your inventory turnover rates well. Inventory turnover measures how often your inventory has been sold and replaced over a set period.
Get Started with Proper Inventory Allocation Today
Inventory management is a critical component of any business. By understanding and utilizing inventory allocation techniques, businesses can save money, increase efficiency, and improve customer satisfaction.
If you want to know more about inventory management or are interested in outsourcing your logistics, don’t hesitate to get in touch with Hopewell Solutions. We would be delighted to discuss your exact needs and see how we can assist.
