What is Inventory allocation?
Pre-allocating or assigning stock while it is in transit or production ensures that customer demand can be met quickly without incurring unnecessary warehousing costs. Allocation of stock to key customers can often support delivery of service levels and retention of key accounts, whilst also ensuring that further stocks can then be assigned to customer to meet their needs and therefore minimising disruption and significant peaks in demand and potential stock out issues.
What are the benefits of Inventory allocation?
Stock allocation of goods in transit or production also supports good cash flow through speed of sale , reduction in handling costs and removes the need to hold excess inventory in the warehouse which comes at a cost of storage. Furthermore forward inventory allocation also supports future capacity planning.
What are the disadvantages of Inventory allocation?
There can also be some challenges around pre-allocation of stock:
- Shortages can occur due to poor demand planning or excess take-up by customers.
- Stock levels can grow due to external economic pressures or unexpected seasonal conditions.
- If a company reserves stock to protect it for premium customers, this can add a layer of complication for the planning and forecasting teams.
- Where a customer over-estimates his needs (“bullwhip effect”), this can lead to expensive stock taking up valuable warehouse space and sales being lost to alternative customers who do have an immediate demand.
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