When to Use Hard and Soft Allocation

Managing inventory across a company’s stores, warehouses, and distribution centers can be challenging. Manufacturers and suppliers frequently use either hard or soft inventory allocation to track stock and maintain optimal inventory levels. Using the right inventory allocation method is vital for ensuring the correct amount of inventory reaches its intended destination on time and streamlining order fulfillment.

Utilizing automation can simplify inventory allocation, whether your company uses hard or soft inventory allocation. Understanding when to use hard or soft inventory allocation and how automation makes them easier can help your company optimize its inventory management process.

Hard vs. Soft Inventory Allocation

Hard and soft inventory allocation differ in their implications for the supplier. Hard inventory allocation is a fixed commitment between supply and demand, while soft inventory allocation is flexible. For suppliers, the difference is that hard inventory allocation means the inventory is firmly connected to customer demand. In contrast, soft inventory allocation is when the supply is committed to the demand but allows more room for adjustment if needed. To better understand the differences between these types of inventory allocation, let’s dive into the specifics of each.

Hard inventory allocation allows no changes to the supply because it is strictly assigned. Hard inventory allocation is more focused on definite actions and execution than planning. The supply is tied to the demand, the sale is final, and the delivery date may be set.

In contrast, soft inventory allocation provides greater flexibility and may change depending on the demand. Soft inventory allocation can focus on concrete actions but typically deals more with the planning stages. The supply is loosely tied to the demand but can be reallocated if higher-priority demand emerges. With soft inventory allocation, order delivery is far off or doesn’t yet have a set date.

Both types of inventory allocation play essential roles in the supply chain during different stages. Whether a business uses soft or hard inventory allocation depends on customer demand, inventory fluctuations, and supply chain efficiency.

When to Use Soft Inventory Allocation

One instance of when to use soft inventory allocation is during the inventory forecasting stage. As a company forecasts its inventory needs, it acquires inventory to meet customer demand but waits for customers to make orders. Sales and production orders can shift or be canceled, so supply plans must be able to change. Soft inventory allocation enables this level of flexibility.

Another example is when customer A places a large order with a long lead time, and customer B places a smaller order with a shorter lead time. If the company doesn’t have enough stock to fulfill both orders, using hard inventory allocation would mean they hold inventory aside for customer A and cannot satisfy customer B’s order. If a replenishment order is on the way, the company could use soft inventory allocation to fill customer B’s order and use the new supply for customer A.

It isn’t best to use soft inventory allocation when sending orders out to customers. In the example above, as the company gets closer to each order’s due date, it becomes time to fix supply to demand. Using soft inventory allocation could make them continually switch inventory around for new orders that come in. Hard inventory allocation is necessary when an order needs to be on its way to the customer or store.

When to Use Hard Inventory Allocation

A manufacturer or supplier uses hard inventory allocation when they devote a specific number of product units for a specific demand. Since hard inventory allocation reduces inventory availability for other orders, it is usually best used later in the manufacturing or ordering process when supply has moved downstream and is closer to arriving at the customer. At this stage, inventory has little flexibility, if any.

A common example of when to use hard inventory allocation is when demand firms up. As orders arrive, companies compare sales with their forecasted inventory to determine the accuracy of the forecast, finalize their purchases, and generate production orders. A wholesale business can have semi-firm demand, such as a bulk order that becomes harder over time as the customer gradually fixes their order numbers. With retail or e-commerce channels, demand only becomes firm when the end customer places an order.

An excellent time to use hard inventory allocation is when the customer knows exactly how many products to order and finalizes their sale. When orders are confirmed and paid for, demand is fixed. The due date is approaching, so the supplier needs to commit inventory to the sale firmly. Now is the time to use hard inventory allocation and release your stock to the execution stage.

Manufacturers and suppliers should avoid using hard inventory allocation when few orders are confirmed. In this state of flux, products may still be in production or order process. Using hard inventory allocation during the planning stages could cause problems with inventory management, such as stockouts and fees for express shipping and order adjustments. Suppliers can also face customer service issues because they could have difficulty filling orders. Soft inventory allocation is the solution when a supplier will likely need to shift stock around.

Factors to Consider When Deciding Between Hard and Soft Allocation

Suppliers may use hard and soft inventory allocation for different products, customers, or areas of their supply chain. Companies also use both inventory allocation models at various stages of the same process. Here are a few factors to consider to determine when to use each inventory allocation model:

• Your company’s selling channels: Determining which inventory allocation model to use becomes even more challenging when companies must plan supply against different types of demand across multiple channels. For example, if your company uses wholesale, retail, and e-commerce channels, demand planning will vary across channels.
• Your company’s available-to-promise (ATP): An ATP model enables just-in-time delivery by preventing overselling when demand is volatile. ATP is one capability of Vendor Managed Inventory (VMI) software, a solution that shares inventory data between supply chain partners and enables supplier-driven replenishment to ensure distributors have the correct quantity of products when they need them. The ATP model harnesses your company’s VMI data to generate alerts when customer orders exceed the stock you have available to promise.
• Inventory forecasting accuracy: Many factors can impact whether inventory forecasting proves accurate. Having excellent inventory visibility is key to better forecasting, but customers can still go in an unexpected direction due to factors outside your company’s control. If your forecast for a product is far greater than the actual demand, you could switch to soft inventory allocation and wait to firm up your order numbers until you receive some orders. This strategy provides a clearer understanding of customer demand.

Whether your company is running soft or hard inventory allocation models, choose an inventory management system that is flexible enough to manage both inventory allocation models. For instance, a VMI program empowers better inventory allocation by allowing suppliers to set rules for how much inventory they should allocate to different retailers or distributors. The VMI solution can then provide replenishment recommendations tailored to each location.

Automating Hard and Soft Allocation

A VMI solution uses predictive analytics to generate automated inventory replenishment recommendations, which your company can use to meet customer expectations while remaining competitive. VMI combines ATP and allocation so your company can use hard or soft inventory allocation where it’s needed most.

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