5 Best Practices for Inventory Allocation

For businesses at any point along the supply chain, rising orders are a welcome development. Yet expansion into new markets and channels brings challenges, especially in inventory management. Tracking products across a supply chain’s stores and distribution centers often becomes a headache as supply chains go global, requiring inventory visibility and control.

One solution for ensuring each location has the correct amount of stock is inventory allocation. Inventory allocation is the facet of inventory management that balances which supply chain partners receive which inventory to optimize availability across locations. The process uses data-driven insights to ensure companies control their inventories to meet customer demand despite shortages, promotions, and other supply chain disruptions. Automation allows companies to drive even more improved inventory tracking and demand forecasting.

Inventory allocation involves strategic decision-making, which is simplified with techniques designed to support the process. Suppliers and manufacturers can benefit from implementing inventory allocation best practices that help them effectively address shortages and disruptions and experience the cost savings of supply chain efficiency.

Types of Inventory Allocation Methods

Companies can accomplish inventory allocation optimization using several different strategies. These inventory allocation models help businesses determine the most effective way to spread their stock between their distributors to minimize costs and fulfill customer expectations. The most common inventory allocation models are:

1. Push Allocation

In push allocation, companies endeavor to spur customer demand by “pushing” products out before they receive sales. Push allocation uses historical and internal data to gauge customer demand and predict sales. Businesses purchase the stock they anticipate needing with the inventory forecast. As orders come in, they sell from the inventory they already have on hand, potentially shortening lead times and reducing shipping costs.

2. Pull Allocation

The pull allocation method has businesses ordering inventory as customers place orders. Rather than relying on the accuracy of inventory forecasts, companies using pull allocation lean on customer demand to justify moving inventory. New sales prompt replenishment orders, allowing companies to reduce the risk of overstocking and improve cash flow.

3. Just-in-Time Allocation

Just-in-time allocation uses a combination of push and pull allocation methods to attempt to have just enough inventory to meet customer demand while minimizing overstock as much as possible. Some manufacturers use just-in-time allocation by keeping raw materials and components on hand and waiting until there’s sufficient demand to begin production.

Benefits and Challenges of Inventory Allocation

Inventory allocation optimization brings benefits and challenges. The advantages companies can gain from using inventory allocation include:

• Improving supply chain flexibility: Improving inventory allocation enables businesses to respond more effectively to short-term demand fluctuations. That’s because inventory allocation using automation increases visibility into inventory levels and tracks real-time movement, helping companies pivot when supply chain disruptions demand it.
• Managing multiple channels: Tracking and distributing stock across multiple selling channels can strain any business. Inventory allocation empowers companies to streamline inventory management across their selling network.
• Preventing overstocking and understocking: Ordering too much inventory ties up your company’s cash flow and can lead to loss of revenue, while understocking can contribute to missed sales and customer disappointment. Optimizing inventory levels and strategically allocating stock creates “just right” inventory that meets customer demand and reduces overstocking.
• Maximizing revenue: Properly allocating inventory to your company’s distribution centers prevents overstocking and understocking. Accurate inventory allocation can help companies overcome supply chain disruptions and maximize revenue.

The following are challenges that arise as businesses try to optimize inventory allocation:

• Demand spikes: Sudden unexpected fluctuations in demand can leave suppliers scrambling to avoid out-of-stocks, potentially leading to the bullwhip effect and overstock.
• Limited inventory visibility: Difficulty tracking products throughout the supply chain creates challenges with fulfilling orders on time.
• Complex supply chains: As supply chains become increasingly global and involve more trading partners, gaining inventory visibility becomes a greater burden for inventory planning teams.
• Poor vendor communication: Efficient communication between supply chain partners is critical for optimizing inventory allocation.
• Inconsistent data tracking: Using manual inventory allocation processes is inefficient and time-consuming. When companies switch to an automated inventory allocation tool, they can reduce errors and ensure they always work with the correct data.

5 Inventory Allocation Best Practices

To improve your business’s inventory allocation, you’ll need a strategy that accommodates its unique needs and addresses its particular challenges. Implementing best practices for inventory allocation can help.

Below are some global inventory management best practices to help your company allocate inventory efficiently and increase supply chain efficiency.

1. Prioritize High-Converting Locations and Critical Customers

Allocating inventory successfully involves meeting customer demand when and where it arises. Making allocation decisions requires your company to consider current demand, historical data, forecasts, market trends, and other patterns, and match them against supply to send stock where it’s needed. Prioritizing locations and customers with the highest sales is critical in ensuring inventory is used most effectively.

Track sales and demand across your distribution centers to determine which customers and locations are the highest converting. Understanding sales data and demand patterns helps clarify whether demand meets forecasts and how your company needs to adjust.

2. Consider Shelf Life Limitations

Categorizing your inventory according to certain priority groups can help you avoid dead stock and minimize financial losses. Better-selling, faster-moving products may have priority over items that sell slower and need replenishing less frequently.

Another essential consideration is shelf life limitation and expiration dates. Product expiration dates should be a critical factor informing inventory allocation, as those with longer life spans last longer on warehouse and distribution center shelves.

Items with the shortest shelf life should be allocated first. Sending products with a shorter shelf life to locations with high sales volume can also keep these items moving and limit obsolescence.

3. Leverage Real-Time Sales Data to Evaluate and Reevaluate Allocation Levels

Inventory allocation is a continual process that requires constant review of sales data. As customer demand shifts, suppliers must pivot their inventory allocation strategy to balance meeting demand with avoiding overstock. Utilizing real-time sales data lets companies determine how much stock they should allocate to which location based on demand.

Real-time data analysis provides critical insight into demand trends, enabling more informed inventory allocation decisions. This on-demand insight helps prevent distribution centers from being short-stocked or having a surplus, resulting in more strategic replenishment.

4. Keep Storage and Warehouse Space Front of Mind to Avoid Over-Allocating

Safety stock is crucial for guarding against demand fluctuations and lead time delays. Having inventory close to where it’s needed reduces lead times and can increase customer satisfaction.

However, over-allocating inventory for a specific location can lead to overcrowding and inefficient cash flow management. Knowing the available storage space across your distribution centers can help avoid sending too much stock to each location.

Automated inventory allocation software can help your company keep storage space in mind. An efficient inventory allocation strategy can also improve forecasting to find a balance that maintains adequate stock levels while minimizing storage and warehousing costs.

5. Consider Upstream Production Rates

Efficient inventory allocation considers how to best manage income and outgoing inventory. While knowing where to send ready-to-sell products is critical to meeting customer demand, companies must also be aware of upstream production rates. Over-allocating inventory to one distribution center could lead to out-of-stocks if the new product isn’t ready in time.

Track production rates by frequently communicating with your suppliers. Engaging with suppliers about their processes and lead times enables your company to make

more strategic allocation decisions.

Supply Chain Enablement With TrueCommerce

If you’re looking to improve your supply chain with more efficient inventory allocation, Vendor Managed Inventory (VMI) software is the solution.

At TrueCommerce, our VMI solution uses automation to enable just-in-time delivery and strengthen collaborative supply chain relationships. VMI software integrates with your ERP or eCommerce solution to automate replenishment suggestions and data analysis, boosting your inventory allocation strategy.

Our webinar, Item Stratification, ATP, and Allocation, also provides insight into how VMI enables item stratification and automation.

Contact us today.