Inventory allocation simplifies your inventory fulfillment.

An e-commerce platform is essential for achieving business success in today’s economy. The e-commerce market proliferates after the year, so running an online store can be very profitable. Inventory allocation becomes essential for an e-commerce business to be sustainable, prosperous, and scalable in the long term.

Managing inventory can be difficult for e-commerce companies.Therefore, it is essential to understand how inventory allocation can help your e-commerce business progress and develop.

What is inventory allocation?

Inventory allocation refers to the location of an organization’s inventory within the supply chain. This includes the number of units in stores, warehouses, and distribution centers. However, when enterprise retailers refer to “planning and allocation” or “initial allocation,” they typically discuss particular organizational processes.

Why do e-commerce businesses need inventory allocation?

Effective inventory allocation is essential for e-commerce businesses to optimize inventory fulfillment and meet customer needs. e-commerce businesses can save valuable time and resources by ensuring inventory is dispatched to the correct location at the appropriate time. Also, proper inventory allocation can prevent various customer service issues from arising.

Brands who get this right will enjoy many benefits, including:

Mitigating the risk of overstocking inventory in one location and understocking inventory in another

Mitigating the risk of overselling inventory and not being able to fulfill orders

Improving multichannel sales management

Building a scalable foundation for the business to grow

Even if you’re a small, boutique e-commerce shop with only one sales channel, inventory allocation can still help you save time and money by ensuring that inventory is where it needs to be, when it needs to be there.

Why do e-commerce businesses need an inventory allocation strategy?

The risk of overstocking

Ordering more stock than needed is the easiest way to meet customer demand. However, this method may only sometimes be the most cost-effective. Overstocking can rapidly increase carrying costs related to warehousing, labor, insurance, and rent.

Besides, having dead stock – products that have been damaged, expired, or gone out of date – can result in lost value. This issue accumulates when inventory remains on the shelf for too long. Allowing the warehouse to store dead stock for an extended period may also cause holding costs to rise.

To prevent overstocking, it is crucial to optimize inventory levels strategically. This can be done by analyzing historical order data, inventory turnover, and other trends. By doing so, businesses can reduce costs and maximize profits.

The risk of overselling

Suppose the customer wishes to purchase the product alongside other available items, and you prefer to deliver the currently available portion of the order. In that case, it may result in a split shipment. While this occurrence is not catastrophic if it happens infrequently, it can increase shipping expenses and unnecessary packaging materials.

To avoid any potential issues, it is crucial to keep track of possible surges in demand, considering variables like seasonal changes and promotional activities. This will enable you to maintain an appropriate safety stock level based on past order patterns and future projections.

More streamlined multichannel management

Inventory allocation becomes more complex as you expand into new sales channels, known as multichannel inventory management, overseeing stock level reorders and inventory forecasting across different sources.  

Build a foundation to scale

Incorporating advanced technology and efficient processes to enhance inventory allocation decisions and reduce costs and time can establish a strong base for your business to expand. However, investing in logistics infrastructure and technology can be daunting, time-intensive, and expensive for both emerging and established brands. Hence, several e-commerce brands collaborate with third-party logistics (3PL) providers to access an expanding fulfillment network, retail fulfillment competence, and inventory management tools that assist in saving time and money while expanding their business.

The factors that affect how a business allocates its inventory

1.Allocation rules

Businesses must consider their inventory strategy and the inventory type before allocating it. It is crucial to determine whether the goods are perishable or non-perishable and if they require rotation. The inventory allocation process should align with the overall inventory management strategy, such as FIFO, LIFO, or any other suitable approach.

2.Capacity constraints

In addition to inventory allocation, businesses must consider their capacity limitations, such as warehouse capacity and staff availability. It is not feasible to allocate unlimited inventory to a single channel. Therefore, utilizing historical sales data can assist in making informed decisions or avoiding past errors.

3.Lead time

When distributing inventory, it is crucial to factor in the lead time and duration to reach its intended location. This consideration ensures that the inventory arrives at the correct place and within the desired timeline. For instance, if you are distributing inventory to a physical store, you must account for the lead time from your supplier. On the other hand, if you are catering to online orders, you must consider both the lead time from the supplier and the time required to ship the product to the final consumer.

4.Inventory data

Automated inventory management software is essential for ensuring accurate inventory allocation. With real-time and precise inventory data, it is possible to determine what inventory is available for sale, where it is located, and how much is in stock. Therefore, to achieve this level of accuracy, it is critical to employ an automated inventory management system.

5.Transportation and storage costs

Storing and transporting inventory can incur various expenses, such as shipping fees, fuel charges, warehouse rental costs, and warehouse staff wages. While assigning stock to a specific sales channel can meet customer needs, it can also result in significant costs that can impact profit margins. For instance, placing inventory in a physical store may require payment for storage and labor expenses. Nonetheless, if the stock fails to sell rapidly, it can lead to inventory-carrying expenses surpassing sales revenue. Investigating customer demand and associated transportation and storage costs is essential to optimize inventory allocation.

6.Returns

Regrettably, all inventory is not sold, and every sale is temporary. Customers may return inventory for various reasons, such as receiving damaged goods, incorrectly shipped items, or changing their minds. To handle returned inventory, businesses must consider the possibility of returns and devise a plan. This could entail setting aside inventory for expected returns, collaborating with suppliers on return policies, or working with a returns management company. If returns persist, businesses may have to explore methods to diminish returns to sustain growth.