Having the right quantity of inventory in the right locations is a crucial element of inventory management.
If you fail to allocate inventory properly across your locations and online sales channels, you run the risk of losing future sales because of low stock, losing customers to your competitors, and dealing with reduced profit margins, among other things.
On the other hand, effective inventory allocation can help you reduce storage costs, speed up order fulfillment, keep customers happy, and eventually increase profitability.
But how can fashion brands achieve a balanced inventory allocation across all channels?
In this article, you will learn what inventory allocation is, why it is important, the best inventory allocation methods, how inventory management software can help, and more.
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What Is Inventory Allocation?
The practice of strategically allocating accurate quantities of inventory throughout a company’s distribution network (factories, physical stores, warehouse locations, and distribution centers) is known as inventory allocation or stock allocation.
In complex fashion retail settings with numerous stores, online sales channels, and storage facilities, it is very important to develop an effective inventory allocation strategy and communicate it properly across the entire organization. This is because the distribution of available stock can have a significant effect on the overall efficiency and profitability of your business.
Inventory allocation opens the way for supply chain efficiency and all of the associated cost reductions because it is based on the real-time tracking and analysis of inventory levels and future demand forecasts.
Benefits of Inventory Allocation
Effective inventory allocation can help your fashion business reduce expenses related to manufacturing, ordering, storing, and shipping by making sure that inventory levels are optimized across the supply chain to meet customer demand.
Proper inventory allocation also helps prevent loss of revenue in the form of dead stock or stockouts. It can also help make sure you have enough safety stock but prevent overstocking, Excess inventory can result in a waste of valuable storage space, as well as increased carrying costs associated with rent, labor, and insurance. Long-term storage of inventory can result in losses due to the depreciated worth of products that are damaged, old, or out-of-date.
On the other hand, having insufficient inventory can also hurt your business. It is bad for your fashion business to run out of apparel items that people want to purchase. It is even worse when you accept orders from customers but aren’t able to fulfill them.
To sum it up, a well-balanced allocation will bring a number of benefits, such as higher revenue from fewer lost sales, enhanced customer satisfaction and loyalty from making sure that customers always get what they are looking for, and higher profit margins.
Considerations for Fashion Brands when Applying Inventory Allocation Techniques
When it comes to inventory allocation, every business has different requirements. Here are some factors that fashion businesses should consider in order to allocate inventory properly:
Inventory demand. The speed at which inventory levels increase, fall, or scarcely move can reveal a lot about what customers want. Forecasting future demand based on past inventory trends and projected sales can help paint a more complete picture of what clothing items your customers will soon be interested in.
Inventory availability. Without a reliable method to monitor inventory availability, you run the risk of experiencing problems with fulfillment. Implementing an inventory tracking system that syncs SKUs and orders and allows you to view your stock levels, fulfillment facilities, sales channels, and customers in one place will help you prevent fulfillment challenges.
Warehouse space. Another factor to take into account is where you place your inventory items, whether it’s in a warehouse, fulfillment center, or backroom. If your inventory is close to where it is needed, it will reach customers faster and, perhaps, encourage repeat business. Аdditionally, it might lead to faster shipment and cheaper prices. The amount of storage space that is available should also be taken into consideration when deciding how much inventory to allocate, keeping in mind the possibility of overcrowding or failing to fill already-paid-for shelves in a facility.
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Inventory Allocation Methods
Businesses can use one of the two main inventory allocation methods: manual and automated. Here’s what you should know about these methods:
Manual method
Some companies decide to manually track and manage their stock levels. Manual inventory control entails using spreadsheets or ledgers, and inventory allocation decisions are made using manual data.
It goes without saying that this method can be ineffective, prone to human error, and harder to gain insights from. As your fashion brand expands, managing your inventory manually can become unsustainable and impair your growth.
In other words, while it might be possible for a small fashion retailer with a few sales channels or physical locations to plan and allocate inventory, the chances of success will decrease significantly as the number of SKUs and channels/locations grows.
Automated method
In the absence of the proper technology and processes to monitor stock levels and product demand throughout a company’s supply chain, inventory allocation becomes a guessing game.
A poor inventory management process and lack of real-time visibility can lead to incorrect decisions regarding where to store products or when to place new orders. This can lead to excess inventory or insufficient inventory distributed to the wrong stores/sales channels, as well as extra carrying expenses.
That’s why many fashion brands invest in technology that provides better inventory visibility and collects data that is necessary to make accurate forecasts and informed inventory decisions. There are a number of solutions that enable a technology-based approach to inventory allocation, including cloud inventory management software like ApparelMagic. With product lifecycle management, enterprise resource planning, accounting, as well as world-class support and training, ApparelMagic can handle the ERP/PLM side for some of the biggest apparel brands. Аt the same time, it is affordable and intuitive enough that a small fashion company can get its employees started within minutes.
Inventory Allocation Strategies
Fashion retailers can choose from several stock allocation strategies. Here are the five most common ones:
1. Universal stock allocation
This strategy is widely used by fashion brands that rely on manual inventory management or allocation. With this strategy, only the most important SKUs will get more precise allocations, whereas the least important ones will simply be distributed equally across the company’s sales channels and locations. This means that hundreds of SKUs might get shipped in the wrong quantities or to the wrong locations.
2. Tier-based stock allocation
With the tier-back strategy, fashion retailers can classify stores and sales channels into tiers depending on sales volume rather than treating every location/channel equally. In other words, the sales channels that have more sales volumes will get more inventory. The problem with this allocation strategy is that the channels with the lowest sales volumes won’t receive as much stock and, as a result, won’t be able to sell as much as the others.
3. Cluster-based stock allocation
This strategy entails clustering the inventory based on categories rather than SKUs. In other words, retailers distribute goods to stores that share certain traits. For instance, geography-based clustering would treat stores in the north differently from those in the south. However, in order for this strategy to be successful, the person making the categories must have a thorough understanding of the products, business, and geography.
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4. Demographic-based stock allocation
This allocation strategy uses the demographic patterns in each store or sales channel. For instance, apparel retailers can tailor their allocation plan to reflect younger customers at locations close to colleges. However, for this strategy to be effective, the retailer must keep a close eye on demographic trends.
5. Demand-based stock allocation
The most effective stock allocations are made when consumer demand dictates a retailer’s choices. The product allocation is based on the stock quantity each location requires to satisfy its specific client base, neither more nor less. Although demand-based allocation is the most complicated allocation strategy, it is also the most precise on this list.
The Bottom Line
Inventory allocation refers to the process of tracking and optimizing stock levels across a company’s distribution network.
When properly implemented, the use of automation and technology for maximum accuracy helps in a number of ways: Reduced losses due to insufficient inventory or excess inventory, improved warehouse management, reduced storage and inventory costs (as well as potential expenses associated with reallocation), and improved overall supply chain management.
To put it differently, effective stоck allocation guarantees that you have the right stock quantity at each distribution site to match demand, avoid issues like dead stock, contribute to happier customers, and ensure that you don’t miss a single sale.
Learn how ApparelMagic’s retail inventory management software solution can improve inventory visibility and enhance your multichannel inventory management, all while reducing your expenses and providing a prompt and accurate fulfillment process.
