Inventory allocation, or the strategic distribution of stock across various locations, is key to recouping those losses and turning your supply chain into a competitive advantage. Without it, you risk losing sales and watching profits dwindle.
Poor inventory management costs retailers hundreds of billions of dollars every year. Avoid contributing to this figure by learning to balance stock levels and meet future demand with proven inventory allocation techniques and tools.
What is inventory allocation?
Inventory allocation is the distribution of products across storage locations and sales channels. It’s a supply chain management process that puts the right products in the right places, at the right time, to meet customer demand.
Businesses of all sizes use inventory allocation, from retailers to wholesalers and online marketplaces. This process happens continuously throughout the business cycle—whether you're launching new products, restocking inventory, or preparing for seasonal demand peaks.
Benefits of inventory allocation
Better cash flow management
Tying up too much capital in slow-moving inventory can strangle your cash flow. On the flip side, not having enough stock of popular items means missed sales. Proper inventory allocation helps strike the right balance and assist with accounting.
Increased operational efficiency
Smart inventory allocation streamlines your entire fulfillment process. When products are stored in the right quantities at the right locations, you can process orders faster, more accurately, and more cost-effectively. Artificial intelligence (AI) makes this easier.
IHL Group found that retailers could improve their gross margins by 25% or more by using AI tools. AI-powered systems can automatically process lead times, supplier performance, and demand fluctuations to determine the best replenishment schedules.
Improved customer satisfaction
Getting products to customers when and where they want them is essential for building loyalty and repeat business. Effective inventory allocation ensures that popular items are always in stock and readily available for quick shipping.
More sales
Stockouts are a sales killer. Customers who can't find what they're looking for will likely shop elsewhere, driving potential revenue towards competitors.
It’s estimated that retailers worldwide lost a staggering $1.77 trillion last year due to stockouts and overstock situations. Strategically allocating inventory can reduce inventory disruption and capture more sales opportunities.
Inventory allocation methods
Pull allocation
Pull allocation is a demand-driven approach in which inventory is only ordered or moved when there is a specific customer demand. It’s popular among retailers and manufacturers who deal with products that have unpredictable demand or short shelf lives.
For example, a clothing retailer using pull allocation might only restock a particular style of jeans when the inventory drops below a certain threshold based on actual sales data.
Push allocation
Push allocation involves forecasting demand and proactively pushing inventory to various locations based on anticipated needs. Retailers use it when managing products with predictable demand or long lead times, like consumer packaged goods or seasonal products.
A sunscreen manufacturer, for example, might use push allocation to distribute large quantities of product to sunny regions before the summer season begins.
📚 Learn: Push vs. Pull Inventory: Choosing the Right Inventory System
Just-in-time (JIT) allocation
The just-in-time (JIT) is an inventory allocation method that aims to have stock arrive precisely when it's needed. It’s a favorite amongst organizations looking to cut carrying costs and improve cash flow.
JIT is more effective when you have stable supply chains and predictable demand. An electronics manufacturer might use JIT allocation to receive components for a new smartphone model just as the assembly process is about to begin, for example.
First-in, first-out (FIFO) allocation
First-in, first-out (FIFO) allocation First-in, first-out (FIFO) allocation ensures that the oldest inventory is sold or distributed first. This method is crucial for businesses handling perishable goods or products that can become obsolete over time.
For example, a grocery store using FIFO allocation would place newer milk deliveries at the back of the refrigerator while moving older stock to the front, ensuring products are sold before their expiration dates.
Considerations for allocating inventory
Inventory demand
Demand ultimately shapes your allocation strategy. You must know which products customers want, where they want them, and when to build out an inventory plan.
By analyzing sales data inside the same platform you use to run your business, you can identify patterns like:
- Product A sells 30% more in the Northeast during winter months
- Product B has consistent demand year-round but spikes during promotions
- Product C is slowly declining in popularity, except in certain regions
These are insights you can act on. For example, you might allocate more winter gear to Northeastern warehouses in October, or ensure promotional items are well-stocked across all locations before a big sale.
Stock levels
Stock levels are your inventory pulse, indicating what's available, low, or overstocked. Key metrics include the reorder point (when to order more) and maximum stock (upper inventory limit).
For example, for your best-selling t-shirts, you might set the following:
- Reorder point: 50 units
- Maximum stock: 250 units
When stock hits 50, you order 200 more.
But it's not just about numbers. Different products need different approaches:
- Fast-moving items might have higher reorder points to prevent stockouts
- Seasonal products could have fluctuating inventory levels throughout the year
- Slow-moving, high-value items might have lower maximum stock to reduce tied-up capital
Storage space
When allocating inventory, consider the physical dimensions of products and how they fit into your available storage. You might need to prioritize allocating fast-moving items to locations with easy access (like next to your stockroom door), while slower-moving products can be stored in quieter areas.
Additionally, consider the cost of storage at different locations. It might be more economical to allocate certain inventory to facilities with lower storage costs, provided it doesn't negatively impact order fulfillment speed.
Work-in-progress (WIP) inventory
When making allocation decisions, consider the production time and resource requirements for work-in-progress (WIP) items.
You might need to reserve warehouse space and resources at specific locations to accommodate WIP inventory, which could influence how you distribute finished goods. Balancing WIP items across different production stages and locations can help maintain a smooth production flow and prevent bottlenecks.
Speed of order fulfillment
Consider how your distribution affects delivery times. Storing inventory closer to your customers generally allows for faster shipping, but it may also increase overall storage costs.
You might also choose to allocate high-demand or time-sensitive products across multiple locations to ensure quick delivery to a wider customer base. For slower-moving items, it might make more sense to centralize inventory in fewer locations to reduce inventory storage costs.
Inventory allocation best practices
1. Use automated inventory management software
Gone are the days of manual counts and guesswork. Modern inventory management tools take the hassle out of tracking your stock.
Now, you can effortlessly create purchase orders, manage stock transfers across retail locations, and conduct regular stock takes using barcode scanning. Apps like Stocky by Shopify POS Pro seamlessly integrate with your point-of-sale (POS) system, offering real-time visibility into inventory status as items move in and out.
Smart POS analytics also provide insights to optimize your product mix, forecast demand, and suggest reorder points, striking the perfect balance between avoiding stockouts and preventing overstock.
2. Maintain safety stock
Safety stock is the extra cushion of products you keep on hand to avoid stockouts during unexpected spikes in demand or supply chain hiccups.
To determine the right amount of safety stock, consider factors like lead times, demand variability, and the cost of stockouts versus the cost of holding extra inventory. While you don't want to tie up too much capital in excess inventory, having a reasonable buffer can save you from lost sales and unhappy customers.
3. Use ABC analysis
ABC analysis is a method of categorizing your inventory based on its importance to your business. Here's how it works:
- A items: High-value products that contribute significantly to your revenue
- B items: Moderately important products
- C items: Low-value products that make up a small portion of your sales
Using ABC analysis, you can prioritize your resources and attention. For example, you might keep higher safety stock levels for A items while adopting a leaner approach for C items.
📌 Pro tip: Shopify’s inventory reports can run an ABC analysis for you. Analyze inventory across all sales channels—including multiple retail stores, your ecommerce website, and social media storefronts—to find those most valuable to your business.
4. Consider regional demand
When selling in multiple regions or markets, demand can vary from one area to another. Weather, local preferences, and cultural events can impact what sells where. Sales data and trends can help you allocate inventory more strategically.
Shopify offers a powerful POS feature called "fulfillable inventory" to help with inventory allocation. You can control how your shipping settings affect which inventory is available to your customers based on their market and shipping location.
For example, if you have different product lines for different regions, it ensures customers only see products available in their area. The fulfillable inventory feature also helps prevent overselling across markets and outside of shipping zones.
To use fulfillable inventory, your store needs to have at least one shipping profile with two or more shipping zone groups with different shipping origins, or have at least one location with pickup in store or local delivery.
5. Work with a 3PL partner
A third-party logistics (3PL) provider can significantly improve how your business allocates inventory. These companies specialize in warehousing, fulfillment, and distribution, often with multiple warehouses and distribution centers to serve different regions.
You can tap into a 3PL’s expertise and infrastructure without the hefty upfront costs of building your own. They can help you optimize your inventory placement, reduce shipping times and costs, and scale your operations more easily as your business grows.
Fortunately, you don’t need to look far for a 3PL provider. Shopify Fulfillment Network will connect your store with Flexport, a leading logistics company, to manage the entire process for you. With Shopify’s flexible platform, external system integrators can easily connect into Shopify, maintaining real-time data visibility as your inventory moves across locations and channels.
Stay ahead of inventory challenges with Shopify
Shopify offers powerful tools and integrations to help you manage your inventory more efficiently. From the Stocky app for real-time inventory tracking to the Shopify Fulfillment Network for streamlined logistics, these solutions can help you improve customer satisfaction, boost sales, and increase operational efficiency.
Don't let poor inventory management hold your business back. Embrace these strategies and leverage Shopify's ecosystem to turn your supply chain into a competitive advantage.
Inventory allocation FAQ
What is the key function of inventory allocation?
Inventory allocation efficiently distributes stock across channels to meet demand and minimize stockouts. It ensures optimal placement of inventory to fulfill customer orders effectively.
How do items get allocated as inventory?
Items become allocated inventory through methods like FIFO, LIFO, or specific identification. This process assigns incoming stock to locations or orders based on predetermined rules.
What is the allocated quantity in inventory?
Allocated quantity is the portion of stock reserved for specific purposes, like customer orders. It's inventory that's committed but not yet physically removed from stock.
What are the four types of inventory classifications?
The four inventory classifications are raw materials, work-in-progress (WIP), finished goods, and maintenance, repair, and operating (MRO) supplies.
