Allocation and replenishment in retail are the core of effective inventory management. Together, they help an organization maintain optimal inventory levels across its different stores.
When implemented effectively, allocation and replenishment aim to achieve the same goal: making sure product quantity in a company’s retail stores is sufficient to meet demand. The main difference between them is how each process achieves this objective.
What Is Replenishment and Allocation in Retail?
Allocation means distributing stock across different retail stores based on expected demand in each location. It involves determining what product quantity to send to each store based on factors like sales history, customer demographics, and store size. Effective allocation guarantees that products are available in abundance where they are most likely to sell. This can maximize sales and boost your company’s bottom line.
On the other hand, replenishment is the process of re-ordering stock in a retail store to maintain enough inventory to meet customer demand throughout a selling season. It involves monitoring inventory levels and re-ordering just the right amount of products (at the right time). This aspect of inventory optimization prevents lost sales by ensuring that stock does not run out. It also eliminates the costs of holding more stocks than necessary.
Factors to Consider in Allocation and Replenishment
Many factors influence how retailers with multiple stores distribute and restock inventory in different locations. The top four include:
Sales Data
Analyzing historical sales trends and customer preferences in different retail stores can provide insights that help you predict future demand and decide where to send your stock. For example, if store A usually sells a product faster than store B, it makes sense to send more stock to store A.
In addition, sales patterns can help you decide when to reorder stocks so that you have enough products to meet demand without piling up unnecessary inventory.
Seasonal Fluctuations
Changes in demand, which are often tied to holidays, weather, or annual events, can dictate how much inventory to hold at a particular time or when to restock. During high-demand seasons, retailers stock up to keep up with increased sales. But when things slow down, they scale back to avoid getting stuck with too much inventory.
Preparation for demand shifts usually happens before the low or high season begins. If you know winter coats will sell quickly in the cold months, for example, you’ll want to have plenty in stock before temperatures drop.
Promotional Activity
Special promotions can dramatically impact allocation and replenishment in retail. For instance, discounts like buy-one-get-one-free and limited-time offers can increase purchases. As a result, you may need to quickly replenish your inventory to meet the demand spike.
If a promotion is only running at certain stores, you’ll need to ensure those locations get enough stock to handle the extra demand while not overstocking at stores that don’t have similar offers.
Store Performance
Stores with high sales tend to receive larger inventory allocations and more frequent restocking orders than underperforming stores.
When you allocate and replenish inventory based on store performance, you optimize stock levels at each location. As a result, you can maximize sales and minimize overstocking.
Key Challenges in Retail Allocation and Replenishment
Allocation and replenishment are two critical strategies in retail inventory management. How effectively your business implements them hugely influences profitability.
Unfortunately, distributing and replenishing inventory across stores is not an exact science. Here are some of the key challenges:
Getting Demand Forecasting Right
It’s tough to predict exactly how much inventory you’ll need. If your prediction is incorrect, you may end up with too little stock to meet demand or much more than necessary.
Accurate demand forecasting relies on precise, complete, and timely historical sales data. However, companies often have incomplete, inaccurate, or out-of-date data, which can lead to incorrect predictions.
Poor-quality data is not the only challenge in demand forecasting. According to McKinsey, an overwhelming majority of businesses still use manual or outdated tools for forecasting demand despite the availability of modern solutions that are faster and more accurate.
Managing Product Life Cycles
A typical product goes through four stages in its life cycle:
- Introduction: The new item enters the market.
- Growth: Growing demand leads to increased production and expanded availability.
- Maturity: The product reaches its maximum potential in the market (market saturation). Sales usually peak at this stage.
- Decline: Sales dip due to market saturation and alternative products in the market.
Knowing when to phase out declining products and introduce new ones can be tricky. If you pull them out too early instead of restocking, you might miss out on the last sales as the products hit their peak. But if you wait too long, you’ll be left with older inventory that no one seems to be interested in anymore.
Gaining Inventory Visibility
It’s challenging to track where your stock is, how much you hold at any given time, and inventory movement across multiple store locations in real time. That’s especially true if you monitor stock levels manually rather than using automated inventory management technology.
Without inventory visibility, you won’t know the right time to replenish stock to prevent product unavailability in your stores. In return, it becomes difficult to prepare for demand shifts. It’s also easy to keep excess stock without a real-time view of your inventory.
Technology’s Role in Retail Allocation
With robust supply chain solutions, such as GAINS replenishment planning software, you can overcome common challenges when creating retail allocation plans. These modern tools have powerful features that make it easy to anticipate demand accurately and optimize inventory management.
Enhances Demand Forecasting and Reduces Inventory-Related Losses
Did you know that businesses worldwide lose billions annually for running out of stock and keeping excess inventory? Supply chain tools can help minimize these losses.
With reliable demand forecasting, businesses can accurately predict what customers will want in a particular store location. Precise predictions ensure that businesses always have the right products in stock (in just enough quantities) to meet current and future demands — all without holding excess inventory.
Streamlines Inventory Management
Instead of manually monitoring inventory levels, replenishment tech solutions can automatically track stock across different stores in real time. This keeps you on top of your inventory service levels at all times and allows you to maintain optimal stock levels.
Some tools allow you to set a minimum inventory level for each item. When stock drops below that threshold, you get an automated reminder to place a replenishment order.
Best Practices for Resource Allocation and Replenishment
The following techniques can help you allocate resources effectively in your retail stores and optimize your supply chain efficiency:
Reorder Point (ROP) Method
ROP is a specific threshold at which you need to replenish your inventory. It tells you the minimum stock level, which, when reached, requires you to place an inventory order to avoid running out of stock.
To calculate it, you must determine:
- Lead Time: Time it takes (in days) for your supplier to deliver your inventory order
- Daily Average Usage: The average sales per day for a particular product
Reorder Point Formula = Daily average usage × Lead time
For example, a company sells an average of 50 pairs of shoes daily. When the organization orders a batch of shoes, its supplier takes about five days to deliver. What should the retailer’s reorder point be?
Lead time = 5 days
Daily average usage = 50 pairs
ROP = 5 Days × 50 pairs = 250 pairs
This means that the right time to place a replenishment order is when 250 pairs of shoes are left in the company’s inventory.
Top-Off Method
The top-off method is a smart way to keep your inventory at optimal levels. Instead of waiting to restock until peak season begins, you replenish inventory (to sufficient levels) during slow periods. With this method, you won’t have to scramble to keep up with increased purchases when customer demand spikes.
The top-off method is a suitable inventory replenishment strategy for stocks that sell quickly and have long shelf lives.
Just-in-Time (JIT) Inventory
Just-in-time (JIT) inventory involves only stocking what you need exactly when you need it. Instead of piling up extra stock, you order products from your supplier only after customers have bought them.
This means that no excess inventory takes up space and there is no risk of overstocking — just a steady flow of products moving in and out as needed.
Developing an Effective Allocation Strategy
An effective allocation strategy has one goal: Maintaining sufficient product quantity in the correct retail stores at the right time. But where do you begin if you want to create and implement an allocation strategy for your company?
- Assess Demand Forecasts: Use supply chain software technology to analyze demand patterns and market trends to predict what customers will want (and where). The more accurate your demand forecast, the better your allocation decisions will be.
- Align Allocation With Sales Goals: For example, if you want to boost sales of a particular product in top-performing stores, you may decide to allocate more stock in those locations. Meanwhile, lower-demand stores get just enough to avoid overstocking.
- Prioritize Inventory: When allocating and replenishing your inventory, first focus on products that are in high demand and the most profitable per unit sold. Make sure they are always available where they sell best. From there, work your way down to lower-priority stock.
Achieving Balanced Allocation and Replenishment
If you want to ensure stock is well-balanced across stores, GAINS replenishment planning software should be your go-to solution.
You can also use the software to:
- Accurately forecast consumer demand
- Accelerate routine replenishment decisions through automation and artificial intelligence (AI)
- Provide a single source of truth for your supply chain team
GAINS replenishment planning software also offers an inventory rebalancing feature that generates stock movement recommendations to ensure all of your company’s stores have optimized inventory.
Learn more about GAINS replenishment planning software and how it’s driving specialty retail’s profitability.
