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Inventory allocation trends: Brace yourself for the new 50/50 world

If we think inventory management is challenging now, we better fasten our seatbelts. Because it’s about to get much harder. Because before long, many industry analysts predict that 50% of all online orders will be fulfilled by the stores and 50% of all online orders will be returned in stores. If and when we reach those numbers, inventory allocation is going to become an absolute nightmare.

How will we manage minimum presentation levels? How will we ensure representative size runs? Will we transfer returns to other stores to better round out the range elsewhere? Will that even make financial sense? Or would it better to just mark them down and clear them out? Or should we hold it in the back room and wait for it to be used to fulfill another online order?

The questions are many and definitive answers are hard to find. Because in most cases, the answers begin with, “It depends.” As in, it depends…on where we are in the selling season. It depends…on the sales velocity of that item. It depends…on our costs to handle and move items between stores. It depends…on backroom capacity.

It will indeed be very difficult to predict where inventory will be needed on any given day. Omnichannel inventory allocation needs will vary from moment to moment and from store to store. Compounding the challenge, omnichannel allocations already must be based — for the most part — on several factors that don’t take into account actual demand:

  • The ability to fill the order complete
  • Supplier capacity and priority
  • Customer proximity
  • Inventory levels in each fulfillment option
  • Minimum presentation levels

How we’ll overcome these challenges to optimize omnichannel inventory allocation

It is very difficult to consistently optimize outcomes when faced with all that variability and complexity. We simply won’t be able to react to sales, fulfillment and return trends as they happen throughout the selling season. As we approach those 50/50 thresholds, attempting to react and allocate in real-time will have real impacts on inventory performance.

And that, of course, is where modern technology will really add value. Inventory allocation decisions based on analyst instinct and (often insufficient) history can be replaced by sophisticated algorithms designed to optimize inventory allocation before the season starts. And we can give those algorithms a big assist if we follow three best practices:

  1. Allocate to the destination, not the source of the sale. Far too often we talk to retailers who account for omnichannel demand by allocating to the shipping (or fulfilling) store, rather than the store closest to the ultimate destination of the sale. It’s a relatively simple change, of course, but it’s one that can have a significant impact on inventory productivity.
  2. Reduce safety stock in our stores. Modern order management platforms source inventory from the best available location and ensure every possible sale is saved, no matter the ultimate destination. Even if we factor in higher fulfillment costs, if your order management and fulfillment processes are optimized, making this one change to your strategy can result in significant inventory investment savings. Successfully reducing safety stock requires some finesse, however, as minimum presentation levels and collection preservation rules must be accounted for in safety stock/ allocation decisions. Fortunately, modern inventory allocation systems can support the development of user-defined rules that incorporate specific instructions based on things like location attributes, minimum presentation levels, product attributes and multiple time dimensions.
  3. Designate some stores as mini-distribution centers in your inventory allocation strategy. Selecting a subset of strategically-located stores with suitable storeroom capacity that can be optimized for efficient pick, pack and ship processes can preserve margins while still meeting the unpredictable demand patterns of omnichannel orders.

    Once designated as distribution centers, your inventory allocation and order management systems should work in sync to ensure these stores have the inventory they need to support ship from store, endless aisle and click & collect orders, and that those order types are sourced from these locations as demand warrants.

In challenge lies opportunity

Optimizing inventory allocation in today’s highly complex and challenging omnichannel environment is certainly tough. However, updated omnichannel strategies — when empowered by modern allocation technology — can help turn these challenges into opportunities for competitive advantage.

Aptos Allocation, Forecasting and Replenishment is an agile, real-time merchandising solution that helps dozens of leading retail brands get the right products to the right places, at the right time. The allocation module features user-defined processes that empower clients to shape the technology to suit their strategies.

Built-in algorithms combine with user-defined rules to deliver flexibility to suit every omnichannel use case. Allocate and replenish on target based on accurate forecasting, dynamic store grading and omnichannel demand.

To learn more, download “Three ways to modify your allocation strategies to optimize inventory as the role of the store continues to expand,” our latest eBook containing more details on how these recommendations can help you optimize your inventory allocation processes