Inventory Allocation Methods & Best Practices (2024)

Having the right amount of inventory in the right places is a critical component of inventorymanagement. Let’s say you’re a clothing retailer with multiple locations acrossthe U.S. How do you make sure each one of your stores is sufficiently stocked to meetcustomer demand? Should each location carry equal amounts of the latest designer jeans, forexample, or should more go to locations in colder climates? How much inventory should youkeep in your warehouse to fulfill online orders? These decisions, and more, underscore theimportance of a sound inventory allocation strategy. Among the benefits, proper inventoryallocation cuts down on storage costs, speeds order fulfillment and ultimately leads tohigher profitability.

What Is Inventory Allocation?

Inventory takes many forms,including products ready for sale; components of unfinished products, such as nuts andbolts; and raw materials, such as steel and wood. Inventory allocation focuses onstrategically distributing and tracking these SKUs across thedifferent locations within a company’s network, such as its physical stores,warehouses, distribution centers and factories. Based on the real-time tracking and analysisof inventory levels and customer demand forecasts, inventory allocation paves the way for supply chain efficiency and its many related costsavings.

Key Takeaways

• Inventory allocation is a data-driven process that determines where and how muchinventory should be sent to individual locations across a company’s distributionnetwork.
• Inventory allocation helps meet customer demand in the most efficient way possible,starting at the manufacturing level where it’s used to avoid productionbottlenecks.
• Companies rely on three main types of inventory allocation methods: pull, push andjust-in-time.

Inventory Allocation Explained

Inventory allocation, also known as stock allocation, is the process of strategicallyallotting accurate amounts of goods and materials throughout a company’s distributionnetwork. Aligned with customer demand, which often varies from one geographical site to thenext, inventory allocation means store shelves will remain properly stocked and onlineorders will arrive quickly and less expensively because they are shipped from warehousesthat are closest to the customers. In addition, product manufacturing can get underwayquickly because the necessary parts and materials are on hand, while warehouse space isoptimized for the appropriate amount of storage.

When Is Inventory Allocated?

Inventory allocation is an ongoing process that should be adjusted according to customerdemand, fluctuations in inventory levels, warehouse availability and overall supply chainefficiency. For example, if those aforementioned designer jeans are sitting on the shelvesat three stores in Florida but are close to selling out at two shops in Maine, it would makesense to reallocate the items north so as not to run out where they’re in demand. Inventory managementsoftware tracks stock levels so that decision-makers can monitor where theirinventory is best served.

Benefits of Inventory Allocation

The total cost of inventory extends beyond how much money it takes to produce or purchase aproduct to be sold. It also includes expenses related to ordering, shipping and storinginventory in warehouses and distribution centers; economic order quantity; lost revenuein the forms of dead stock, stockouts and wasted storagespace; and associated labor costs. Effective inventory allocation helps a business containthese expenses by ensuring that stock levels are optimized across its supply chain toswiftly meet customer demand. Additionally, you’ll need to understand what you have onthe shelf and what is allocated to future orders to aid in replenishment. Savings can bereinvested in the business and improve the company’s financial standing.

In manufacturing, proper inventory allocation ensures that the right materials are in theright facilities for product production. Waiting for parts to arrive when there’s asudden uptick in demand can delay the manufacturing process, leading to lost sales andcustomers taking their business elsewhere.

On the retail level, allocation can speed shipping and delivery by placing inventory closerto the customers who want to buy it, whether in physical stores or nearby warehouses so asto minimize delivery times. This is especially important in the case of perishable goods,where every day of misallocation brings the items closer to their expiration dates.

In summary, the benefits of inventory allocation include the following:

• Reduced cost of inventory
• Optimized stock levels across the supply chain
• Improved ability to meet customer demand
• Reduced manufacturing delays
• Minimized sales losses
• Improved shipping speed
• Reduced delivery times

Challenges of Inventory Allocation

Without the right technology and systems to track inventory levels and customer demand acrossa company’s supply chain, inventory allocation becomes little more than a guessinggame. Indeed, lack of real-time visibility into inventory can misinform inventory-relateddecision-making, including where to store products, how much to produce and when it’stime to reorder. The inability to accurately understand what inventory is allocated tofulfill future demand can lead to too much or too little inventory allocated in the wrongchannels or regions, along with unnecessary carryingcosts.

Naturally, even the best technology can’t predict every supply chain bottleneck, inventoryshortage or change in customer demand that may impact an otherwise effective inventoryallocation process. An earthquake or tornado, for example, can temporarily shut down theoperations of a major manufacturing plant or destroy warehouses that store inventory.Businesses are well advised to have plans already in place that address how to handle suchsituations.

Challenges of inventory allocation without the right systems include these issues:

• Lack of real-time visibility
• Poor inventory-related decision-making
• Inability to determine future demand
• Wrong inventory levels in the wrong channels or regions

Inventory Allocation Methods

Businesses may use one of several methods to determine how best to allocate inventory acrosstheir distribution points. One method responds to customer demand, one seeks to create itand a third combines both approaches.

1. Pull allocation:

   This allocation method is based on the “pull” of customer demand forproducts. In other words, inventory is sent to where customer demand justifies itneed to be. This minimizes having excess inventory and helps keep storage costs low,though it could potentially leave a company scrambling to fill its shelves shoulddemand suddenly change. Companies that sell specialty products or that repair itemsrequiring new parts typically rely on pull allocation.

2. Push allocation:

   Rather than waiting for customers to send the signal, the push model seeks to createproduct demand so as to “push” inventory out to buyers. Push allocationrelies on the accuracy of demand forecasting models that predictsales based on the analysis of internal and external data, including historicaldata. A retailer stocking up on school supplies early in the summer is an example ofthe push allocation method. The same goes for the manufacturers that produce theschool supplies and stock their warehouses and distribution centers with properlyallocated levels of inventory months before school is back in session.

3. Just-in-time allocation:

   Just-in-time (JIT)allocation uses a mix of push and pull methods to get as close as possibleto having “just enough” inventory on hand where it should be to meetdemand. A common JIT strategy among manufacturers is to keep components and rawmaterials on hand but wait until customer demand warrants production. The samestrategy works for restaurants, which keep frozen or unassembled food ready toprepare for customers’ orders. The danger of JIT allocation lies in a supplychain disruption, as was rampant during the COVID-19 pandemic. Having accessible safety stock so as tonot run out of inventory may help cushion the blow, though the ability to do sowouldn’t be viable for businesses like flower shops.

Manual vs. Automated Inventory Allocation

It’s not unusual for small shops to manage their inventory manually, using simplespreadsheets or stock books. For a business with a limited product selection, manuallytracking inventory — as in physically counting how much is in stock — might seem reasonable,albeit error-prone. But as the business grows, adds new products, opens new locations, shipsto new regions and works with more suppliers, automating the inventory allocation processbecomes more necessary. This speaks to the need for an enterprise resource planning (ERP)system or inventory management system that tracks inventory levels in real time, monitorscustomer demand, streamlines order fulfillment andreallocating, and handles other forms of inventorycontrol.

Four Inventory Allocation Rules and Best Practices

As with other inventory management processes, there is no one-size-fits-all list of rules forinventory allocation. Every industry has its own idiosyncrasies, and each company has itsown needs, challenges and resources available to meet demand for its unique customer base.So, consider the following less as “rules” and more as best practices that canbe modified and adapted to accommodate your business.

1. Conduct market research and consider regional demand.

   A successful inventory allocation strategy ensures that inventory levels matchcustomer demand wherever that demand may be. This requires careful analysis ofmarket trends, buyer behaviors, geographical trends and other patterns that mayinform decision-making. Research can shed light beyond how much inventory toallocate among a company’s distribution points to also embrace variations ofinventory. For example, a retailer of T-shirts will likely know that industryresearch shows size large is bought most frequently. So, it makes sense to allocatemore large T-shirts across all locations — particularly during the summer when mostpeople wear T-shirts — and then track stock levels to be sure that the supply ismeeting demand.

2. Consider items with shorter shelf lives to have higher priority.

   Shelf life and expiration dates should be top priority when allocating inventory infood, cosmetics, flowers and other products with a finite life span. Items with theearliest expiration dates should be allocated first to locations with higher volumesof sales to minimize financial losses. Grocery stores, for example, tend to put milkwith the soonest sell-by date up front so customers grab those cartons first. Thiscould also apply to “fad” items for which demand lasts a short period oftime.

3. Use real-time data.

   Hand in hand with the first guideline, the real-time tracking of inventory levelsacross a business’s supply chain can most accurately guide how much and whereinventory should be allocated and replenished. Data analysis and demand forecastingcan expand know-how by identifying trends and patterns in customer demand that mayinfluence inventory allocation decisions. It aids in using data proactively, such aswhen you’re selling through in one location and not another — real-time datawould allow workers to see this and move the inventory to sell through.

4. Automate what you can.

   Especially as a business grows, the ability to automate inventory allocation can takethe heavy lifting off of employees, who no longer have to manually track stocklevels across multiple locations to make sure they match customer demand. Automationcuts down on both labor costs and errors inadvertently made by employees, tracksinventory throughout the supply chain, speeds order time and replenishment,optimizes storage space and can lead to greater profitability.

Factors to Consider in Inventory Allocation

It’s important to be methodical and data-driven when deciding how to distributeinventory most effectively. Customer behavior and regional trends may change, for example,and a good inventory management system should be able to make any necessary adjustments.Among the factors to consider in inventory allocation:

• Customer demand.

  Inventory levels and the speed at which they increase, decrease or barely budge speakvolumes about what customers want. Demand-forecasting tools can help create a fullerpicture about what customers may soon be clamoring for, based on historical trendsand sales forecasts.

• Stock levels.

  Determining and allocating the right amounts of inventory across a supply chain canbe a balancing act of too much vs. too little, though either extreme puts a businessat risk of financial loss. Overstocking often results in higher carrying and laborcosts, as well as the expiration of perishable inventory. Understocking can lead tostockouts and lost revenue. It may also mean customers end up buying from yourcompetitors instead.

• Physical storage space.

  Where you allocate your inventory, whether in a backroom, warehouse or fulfillmentcenter, is another consideration. The closer inventory is to where it’sneeded, the quicker it can get into customers’ hands and, hopefully, lead torepeat business. It can also result in shorter shipping times and reduced cost.Additionally, decisions about inventory allocation should factor in how much storagespace is available, keeping in mind the potential for overcrowding or not fillingalready-paid-for shelves in a facility.

• Work-in-progress inventory.

  Inventory allocation isn’t only about where to distribute ready-to-sellproducts. It also includes determining the best placement of partially completedproducts and items needed to produce those products, such as components like nutsand bolts, raw materials and product packaging. Known collectively aswork-in-progress (WIP) inventory, these must be tracked and properly allocatedthroughout the supply chain to ensure that they’re available when and wherethey’re needed to avoid production bottlenecks and potential delays.

• Reallocation.

  As mentioned above, too little or too much inventory at any given location can hurt abusiness financially. Reallocation of inventory to accommodate demand can help,providing the company can still make a profit. Otherwise, it may be less costly tokeep items in their original locations and know better the next time.

Improve Inventory Allocation With Automation

NetSuite InventoryManagement Software (IMS) provides real-time inventory visibility across the manyplaces inventory can be allocated and managed, including retail stores, warehouses,distribution centers and manufacturing facilities. IMS automates the process of tracking,replenishing and allocating inventory to ensure that the right items are available in theright quantities and at the right times and places. This includes allocation of rawmaterials and components at factories, as well as products ready for sale. All of thesedetails feed into NetSuite’s DemandPlanning tool, which also accesses historical data and sales forecasts to helpinventory leaders plan for future demand.

From gathering the materials needed to first manufacture a product to a customer pulling thatproduct off a store shelf, having sufficient inventory at the ready is what allocation isall about. Best left to automation for the highest level of accuracy, proper inventoryallocation minimizes losses due to overstocking and understocking, cuts down on storage andpossible reallocation costs, helps maintain supply chain efficiency — and makes surecompanies don’t miss out on a single sale.

Inventory Allocation FAQs

What does allocation mean in inventory?

Inventory allocation is the process of strategically allotting accurate amounts of goods andmaterials throughout a company’s distribution network. Aligned with customer demand,inventory allocation means store shelves remain properly stocked, and online orders arrivequickly and less expensively because they are shipped from warehouses that are closest tothe customers. In addition, product manufacturing can get underway quickly because thenecessary parts and materials are on hand, while warehouse space is optimized for theappropriate amount of storage.

What is allocation in warehouse?

Warehouse allocation can be a big-picture process that determines which warehouses among manyget which goods for distribution. This can lead to quicker and more affordable shippingoptions when high-demand locations sell out. Warehouse allocation can also refer to a moremicrofocused process, such as where to properly distribute stock within one warehouse. Manywarehouses will use internal allocation to keep high-turnover or perishable goods visibleand up front, whereas long-term stock may be placed farther away or at an off-site location.

What is allocation in supply chain?

Supply chain allocation describes the process of determining where to locate inventory and atwhat quantities along a company’s variety of distribution points, such as a retailstore, warehouse or distribution center. Efficient allocation can help pare carrying costsand meet customer demand.

What does allocation mean in manufacturing?

Allocation in manufacturing means that the necessary quantity of materials is availablethroughout a company’s myriad facilities to ensure that the flow of production meetscustomer demand.

What does going on allocation mean?

When inventory “goes on” allocation, it means an item has been allocated forrelease from the warehouse but is still there.