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Blog / Oct. 20

The Allocation Imperative: Do You Know How Your Inventory Investment is Being Spent?

Carlo Hanna

We all know the old saying, right inventory, right place, right time, (right size for apparel/footwear); in my experience, however, I often find that many retailers’ allocation processes don’t necessarily complement the time invested in the buying, assorting and planning processes.  If we think of how much time is spent designing, developing, planning, assorting and producing merchandise, say up to 18 months, and then we think of how much time and resources is devoted to allocation, I think we can agree that more focus is needed to achieve precise allocation.

As inventory is either a retailer’s biggest asset or their biggest liability, how each unit is allocated can be equated to how each dollar is spent towards an investment.  The return on your investment can either be very rewarding or extremely disappointing.  Best in class retailers have this piece figured out and their allocation team is considered an equally important role in the Merchandise, Planning and Allocation (MP&A) process.

With MP&A, establishing a strong business process is the foundation to driving consistency, accuracy and achieving results.  Focusing specifically on the allocation piece, it is critical that the proper planning and setup happens prior to the goods arriving at the distribution center.  Understanding key components like life of item, intended customer demographic, size range, flow strategy and other information is critical to ROI-driven allocation.

Of course, the system in place for allocation also plays a big role in supporting an optimized and lifecycle driven allocation process.  When evaluating Allocation & Replenishment solutions, it’s important to note that some solutions offer out of the box allocation logic, some solutions require users to create all their own logic, and thirdly, solutions like Aptos Allocation and Replenishment are available that offer both out of the box logic as well as the ability to create user defined logic.

Because the out of the box logic is typically very basic, it is highly recommended that a tool that offers user defined calculations is leveraged.  User defined calculations are important because they allow specific instructions to occur with each distribution.  Things like location attributes, product attributes or multiple time dimensions can be leveraged to create a user defined calculation along with many mathematical functions.  Since the information you have available to make decisions varies at each point in the lifecycle, how you leverage that information should be incorporated into your Allocation & Replenishment solution.

The next important criteria in evaluating a solution is whether you have the ability to setup distributions for auto allocation or whether distributions need to be setup manually.  Of course, the goal here is efficiency.  It is simply not efficient for a user to manually allocate each item and there is also an impact to when the distribution center actually receives said distributions.  In order to keep goods moving, the DC team working and planners focused on plans, an auto allocation process is a must.

That being said, all distributions can’t be put on auto allocation.  There are many instances where an allocation requires user intervention.  There are many reasons for this, perhaps the sales are beating expectations and inventory is limited or perhaps the opposite is occurring and allocations need to slow down.  However, it is not easy to always identify which items should be auto allocated and which ones require special care.  For this reason, having a strong analytics solution with an exception reporting process helps in that identification process.  With a strong analytics solution, alerts can be setup which can let users know of items with DC stock that are turning x % faster than the chain to help prioritize those distributions.  Users should be reviewing this exception report weekly and making decisions on which of those items should be managed manually and which can be ignored to continue running on auto allocation.

Inventory management is a critical component to running a profitable retail business.  Investors are consistently looking at inventory cleanliness and ownership on a year over year basis.  The allocation process while extremely complex and sometimes overwhelming can be turned into something that is automated, is exception based and is repetitive with the right systems and processes in place.  Once the allocation process is optimized, the right stores should be well in stock at each point in the lifecycle.  If you spend your inventory in this way, you can have the maximum return on your investment.