Retail Dogma

Inventory Allocation in Retail

Inventory allocation is the process of assigning specific products, in specific quantities to be delivered to store locations, where they will be displayed and sold.

Inventory allocation is typically done by the merchandiser or the inventory controller, and is uploaded on the retail merchandising system to be seen and actioned by the warehouse team.

When Does Inventory Allocation Happen?

Inventory Allocation

The allocation process can take place at any point throughout the year, and is not necessarily restricted to new shipments received from suppliers. There are different scenarios where inventory allocation is needed:

1. Initial Allocation

When an order or a shipment is received from the supplier an initial allocation needs to take place, in order to specify which store will get which products and in what quantities.

After the initial allocation has been done and sent to stores, the replenishment system comes into play, where pieces that are sold will get restocked based on the replenishment rules set by the merchandiser.

Read Also: Replenishment Systems in Retail

2. Manual Allocation

Throughout the year, there will be times when manual allocation will be needed to fulfill trading needs.

This usually happens during high peak trading days and during sale times. During those times the selling of the items is accelerated and so additional quantities are allocated to the stores to support this higher speed of sale and to avoid out-of-stock situation.

This could be done by adjusting the min-max levels to accommodate the temporary increase sales, or by simply sending additional pieces in the form of manual allocation.

After the event has ended the min-max levels are then returned back to normal and extra stock can be sent back to warehouse.

Importance of Inventory Allocation

Like most of the aspects of inventory management, allocation is important in ensuring the stores have the right stock, at the right place, in the right quantities, at the right time.

After all, the display area at the stores will always be less than the total merchandise the business is carrying. So making sure that each store is getting the right amount that is suitable for display and based on the sales levels of that particular store will ensure best merchandise flow practices.

When stock is allocated properly, there will be less need for moving back & forth between stores and warehouse and also between stores. This saves a lot of time and resources that are wasted in deliveries and transfers.

Also when stores have the right amount of stock, there will be less missing sales opportunities and a better customer experience overall.

Inventory Allocation Considerations

Things to consider while setting your inventory allocation rules:

  1. Store size and layout
  2. Store grade in terms of sales volume (A, B, C,..etc)
  3. Customer profile of each store

When you operate multiple store locations, you will find that not all stores are equal. Each store is different in what it sells, based on the customer profile, and how much it sells per day. All this has to be taken into account, while creating your inventory allocation rules.

Stores need to be graded based on their annual turnover (sales) and their customer profiles should be determined. Then based on that certain products can be excluded or included in the allocation and quantities will be adjusted to match the sales volume and speed.

Remember that if one piece is at Store A, it is not at Store B, nor at the warehouse. This means that if Store A doesn’t have any chance to sell this piece, it will go to markdown later on and the retailer will lose margins on it.

Your ultimate goal is to realize the highest gross margin on your inventory, and mastering allocation is key in achieving such goal.

When you set the allocations right from the start, this will have a positive effect on your inventory turnover and GMROI.

Read Also: Gross Margin Return on Inventory (GMROI)

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