In this article

Inventory Allocation: Everything You Need to Know in 2024

2.5 Minutes

In this article, we explore what inventory allocation is and its benefits. We will also identify some methods and share our process for effective inventory allocation. 

inventory allocation
Source: tranquilbs.com

What is Inventory Allocation?

Inventory allocation is the process of assigning specific quantities of available products to fulfill customer orders. This allocation ensures efficient management of stock and prevents overselling.

Example: A retail company with 100 units of a popular smartphone model may allocate 30 units to fulfill pending online orders, 20 units for in-store sales, and 50 units for upcoming promotional events to effectively distribute their limited stock and meet various demands.

what is inventory allocation
Source: tranquilbs.com

Benefits of Inventory Allocation 

The benefits of inventory allocation can vary depending on the specific business and its objectives. Here are some of its advantages:

1. Optimized Inventory Management: 

Inventory allocation allows companies to efficiently manage their stock by assigning specific quantities to fulfill orders. This reduces the risk of overcommitting inventory to one sales channel or customer group.

2. Prevention of Overselling: 

By reserving inventory for specific orders, businesses can prevent overselling that can lead to customer dissatisfaction, backorders, and potential revenue loss.

3. Improved Order Fulfillment: 

Inventory allocation ensures timely and accurate order fulfillment. This enhances customer satisfaction and maintains a positive reputation.

4. Better Demand Planning: 

Allocation data provides insights into which products and customer segments are in high demand This aids in more accurate demand forecasting and inventory replenishment decisions.

5. Enhanced Customer Service: 

Allocation helps businesses prioritize orders based on customer importance. This allows them to provide excellent service to key customers and meet specific delivery commitments.

allocate inventory
Source: wisys.com

Inventory Allocation Methods 

Here are some common inventory allocation methods to optimize inventory management and meet customer demand efficiently:

1. Pro Rata Allocation:

Pro Rata Allocation divides available inventory among customer orders based on order size or value, ensuring a fair distribution based on the percentage of total demand each order represents.

Example: A retailer with 200 laptops allocates 60 laptops to a large wholesale order and 40 laptops to a smaller retail order, proportionate to the size of each order.

2. Priority Allocation:

Priority Allocation assigns inventory to customer orders based on predefined criteria, such as customer type, order urgency, or loyalty, prioritizing high-value or strategically important orders.

Example: An electronics distributor prioritizes fulfilling an urgent order from a key corporate client for 50 smartphones over a routine retail order for 30 smartphones.

3. First-Come, First-Served (FCFS):

FCFS allocates inventory based on the order in which customer orders were received, following a sequential approach that fulfills orders in the order they were placed.

Example: An online bookstore allocates available copies of a bestselling book to customer orders in the order they were received, ensuring fairness in fulfilling orders.

4. Critical Ratio Allocation:

 Critical Ratio Allocation considers the profitability and time-to-fulfillment of each order, prioritizing orders with higher critical ratios, where the ratio is calculated by dividing the order's contribution margin by the time required for fulfillment.

Example: A manufacturing company allocates resources to produce a custom machine urgently needed by a high-margin customer, prioritizing it over a lower-margin order with a longer lead time.

the inventory allocation
Source: mctimothyassociates.co

10 Step Inventory Allocation Process

Use our 10 step Inventory Allocation process to effectively distribute your inventory among various sales channels. Simply follow the steps below:

Step 1: Define Allocation Criteria

Begin by establishing clear criteria for inventory allocation, which could include factors like customer priority, order type, product demand, and profitability.

Example: A sports apparel retailer sets allocation criteria that prioritize VIP customer orders over regular customers. For instance, if they have 100 limited-edition jerseys and receive 50 VIP orders and 150 regular orders, they allocate 50% of the jerseys to VIP customers and 50% to regular customers.

Step 2: Determine Available Inventory

Calculate the total available inventory for the products in question. This involves regularly updating your inventory database to reflect real-time stock levels.

Example: A toy store has 500 units of a popular action figure in stock at the start of the day.

Step 3: Record Customer Orders

Collect and record incoming customer orders, specifying the products and quantities requested by each customer.

Example: The toy store receives 20 customer orders for the action figure throughout the day with quantities ranging from 5 to 50 units per order.

Step 4: Prioritize Orders

Apply the allocation criteria established in Step 1 to prioritize customer orders based on their importance or relevance to your business goals.

Example: Using their criteria, the toy store prioritizes an order from a long-time collector (VIP) for 50 units over a standard order for 30 units from a new customer.

Step 5: Allocate Inventory

Allocate the available inventory to fulfill the prioritized orders, ensuring that the allocation aligns with the established criteria.

Example: The toy store allocates 50 units of the action figure to the VIP collector's order, reserving these items for their purchase.

Step 6: Adjust Allocation as Needed

Continuously monitor inventory levels and customer orders, making adjustments to allocation if necessary to meet changing demand or priorities.

Example: Later in the day, the toy store receives another VIP order for 20 units of the action figure. They adjust the allocation, taking 20 units from the regular orders to fulfill this VIP order, ensuring they meet their loyalty program commitments.

Step 7: Communicate Allocation to Stakeholders

Notify relevant stakeholders, such as the warehouse team or fulfillment center about the allocated inventory to ensure accurate order fulfillment.

Example: The toy store communicates the allocation details to their warehouse staff specifying which products are reserved for which customers and the order in which they should be packed and shipped.

Step 8: Fulfill Orders

Pick, pack, and ship the allocated inventory to the respective customers following the allocation priorities and ensuring timely delivery.

Example: The toy store's warehouse team packs and ships the 50 units allocated to the VIP collector followed by the other allocated orders.

Step 9: Update Inventory Records

After fulfilling the orders, update the inventory records to reflect the actual allocation and the remaining stock.

Example: The toy store's inventory system now shows that they have 430 units of the action figure left in stock.

Step 10: Review and Analyze

Periodically review the effectiveness of the allocation process, analyze customer satisfaction, and adjust allocation criteria as needed to improve efficiency and customer service.

Example: The toy store conducts a monthly review of its allocation process making adjustments to ensure it continues to meet the needs of its VIP customers while managing overall demand effectively.

is inventory allocation
Source: dclcorp.com

Case Study Example

SportElite is a company that specializes in selling sports apparel. The company is facing the challenge of allocating inventory efficiently among its various product categories and sales channels. Here's how they implemented our step-by-step process:

Step 1: Define Allocation Criteria

SportElite, a sports apparel retailer, establishes allocation criteria that prioritize VIP customer orders based on historical purchase data and order value. For instance, if they have 100 limited-edition jerseys and receive 50 VIP orders and 150 regular orders, they allocate 50% of the jerseys to VIP customers and 50% to regular customers.

Step 2: Determine Available Inventory

SportElite calculates the total available inventory of limited-edition jerseys at the beginning of the day using its inventory management system which shows 500 jerseys in stock.

Step 3: Record Customer Orders

Throughout the day, SportElite's online platform records 20 customer orders for the limited-edition jerseys ranging from 5 to 50 units per order.

Step 4: Prioritize Orders

Using their predefined criteria, SportElite prioritizes an order from a long-time VIP customer who orders 50 jerseys over a standard order for 30 jerseys from a new customer.

Step 5: Allocate Inventory

SportElite allocates 50 jerseys to the VIP customer's order, and ensures these items are reserved for their purchase.

Step 6: Adjust Allocation as Needed

Later in the day, SportElite receives another VIP order for 20 jerseys. They adjust the allocation by taking 20 jerseys from the regular orders to fulfill this VIP order while maintaining the balance of VIP and regular allocations.

Step 7: Communicate Allocation to Stakeholders

SportElite communicates the allocation details to their warehouse team specifying which products are reserved for which customers and the order in which they should be packed and shipped.

Step 8: Fulfill Orders

SportElite's warehouse team picks, packs, and ships the 50 allocated jerseys for the VIP collector followed by the 20 allocated jerseys for the additional VIP order which ensures timely delivery.

Step 9: Update Inventory Records

After fulfilling the orders, SportElite updates their inventory system to reflect the actual allocation showing that they now have 430 limited-edition jerseys remaining in stock.

Step 10: Review and Analyze

SportElite conducts a monthly review of their allocation process to ensure they continue to meet the needs of their VIP customers while managing overall demand effectively. They adjust their criteria as needed to maintain high customer satisfaction.

We hope that you now have a better understanding of what Inventory allocation is, its benefits, and how to effectively allocate your inventory. 

If you enjoyed this article, you might also like our article on inventory buffer or lead time in inventory.

Schedule a free automation consult
Learn more

Level up your Google Sheets skills with our free Google Sheets automation guide

Wasting too much time doing things manually in spreadsheets? Want to spend more time doing what you love? Our 100% free, 27-page Google Sheets automation guide is full of new tips and tricks that will save you time and money!