Optimizing Profitability through Strategic Inventory Allocation

Inventory Allocation

Inventory can take numerous forms, including finished items, components of unfinished products, such as nuts and bolts, and raw materials like steel and wood. Inventory allocation is concerned with strategically distributing and tracking these SKUs across a company’s network, such as physical storefronts, warehouses, distribution centres, and factories. Inventory allocation, which is based on real-time tracking and analysis of inventory levels and customer demand estimates, opens the way for supply chain efficiency and the numerous cost savings that come with it.

Importance of Inventory Allocation in Inventory

Reasons for Inventory Allocation in EcommerceChallengesBenefits
Avoiding OverstockingCapital tied up in excess inventoryCosts: COGs, loans, carrying costs, opportunity costRisk of damaged or expired productsEfficient use of storage space and capital Cost savingsPreventing product depreciation
Preventing Under-Stocking and OversellingStockouts and customer frustrationLoss of sales and brand imageUnfulfilled ordersEnsure product availabilityAvoid loss of sales and customersPreparedness for promotional events
Streamlined Multichannel ManagementComplexity in managing multiple sales channelsRisk of order interruptionsInventory tracking challengesEfficient allocation across channelsReal-time inventory trackingOrder fulfilment continuity
Faster Shipping and Lower CostsHigh shipping fees for the wide customer baseInefficient shipping routesReduced shipping costsFaster shipping speedsEnhanced customer satisfaction

Factors Affecting Allocation Inventory

  1. Demand Forecasting
  • Important for meeting distribution channel demands
  • Businesses have the right inventory levels
  • Using data on customer purchasing behaviour
  • Anticipate demand data based on historical data
  1. Inventory Availability
  • Important to ensure products are near shipping addresses
  • Avoid fulfilment issues
  • Saves time through inventory tracking technology
  1. Allocation Rules
  1. Lead Time in Allocation
  • Duration for Inventory to reach its destination
  • Ensure timely and accurate delivery
  1. Inventory Data
  • Monitor inventory details, location, and availability for sales
  • Accuracy through automated inventory management software
  1. Warehouse Availability
  • Warehouse space availability and pricing are evaluated
  • Storage and Fulfilling orders from home
  • Partnership with 3PL logistics provider for efficient storage and fulfilment
  • Variation in storage charges per order

Challenges of Inventory Allocation

  1. Without the correct technology and methods, inventory allocation may be extremely difficult. 
  2. Without real-time inventory insight, every choice you make regarding storage, reordering, and manufacturing may become a guessing game. 
  3. Without understanding the inventory assigned for future demand fulfilment, you risk having the wrong amounts allocated to the wrong locations or channels, resulting in unnecessary carrying costs. 
  4. No system can anticipate every change in customer demand, potential bottleneck, or inventory constraint that might affect the allocation process. 
  5. Natural catastrophes, political upheavals, and other unforeseen occurrences can halt production, delay transportation, and damage warehouses. 
  6. You must have contingency plans in place to cope with such situations.

Methods of Inventory Allocation

Allocation MethodWhat is it?Examples
Pull AllocationInventory is sent based on customer demand, minimizing excess inventory and storage costs.This can lead to challenges if demand suddenly changes.Used by companies with speciality products or for repairs.Specialty product sellers, and repair part suppliers.
Push AllocationInventory is sent based on demand forecasts, creating product demand. Relies on forecasting accuracy. Used by retailers stocking up on seasonal items in advance.Retailers preparing for back-to-school season, manufacturers.
Just-in-Time AllocationCombines push and pull methods to maintain minimal inventory while meeting demand.Manufacturers keep raw materials but wait for demand to produce. Restaurants prepare food upon order.Manufacturers, restaurants (with some safety stock considerations).

A Study on Hierarchical Ad Inventory Allocation Framework

Challenges in Ad Impression Allocation

Challenges in Ad Impression AllocationImpact on Ecosystem
Complex research issue for publishersAllocation among diverse advertising models with different trading mechanisms
Coupling relationships with other strategiesInfluence on pricing, information disclosure, and other publisher strategies
Impact on downstream playersInfluence on demand-side platforms (DSP) and advertisers’ bidding strategies
Need for a novel frameworkRequirement for a new framework to aid rational ad inventory allocation decisions in PA markets

Challenges in Ad Impression Allocation for Publishers

  • Publishers face three key challenges: uncertainty, scarcity, and diversity.
  • Uncertainty arises from unpredictable user visits to publishers’ landing pages.
  • A limited supply of ad impressions compared to advertisers’ high demand.
  • Diverse ad inventory selling models, including real-time bidding (RTB), private marketplace (PMP), header bidding (HB), and offline contracts.
  • These challenges increase the complexity of ad impression allocation decisions for publishers.
  • Allocation decisions impact both individual revenues and market-wide supply-demand balance.
  • Ad impression allocation is critical in programmatic advertising (PA) markets.

Programmatic Advertising Growth and Evolution

  • Explosive growth in programmatic advertising (PA) in display advertising markets.
  • In the USA, PA spending reached $32.56 billion in 2017, capturing 80% of the online display advertising market.
  • In the UK, over 75% of online display advertising spending was programmatically traded by the end of 2017.
  • In China, the PA market was $11.69 billion in 2017 and is projected to grow to $29.6 billion by 2019.
  • PA driven by big data user profiling and precision bidding techniques.
  • Shift from traditional models to fine-grained, real-time ad impression trading.
  • Facilitates precise ad-audience matching and efficient allocation of ad resources for improved market performance.


A sales season’s allocation will make or break the allocation concept. Each location must have the proper amount of each product (and warehouses must have adequate safety stock to cushion demand fluctuations). Customers will not buy things that are not available, and they will not buy more than they require. As a result, merchants must precisely predict sales demand for a certain SKU at each sales location. Retailers use several allocation strategies to prevent the costly implications of improperly allocated inventory.


How to allocate freight to inventory how to allocate freight to inventory?

To apportion your freight charges, you must first calculate them. To calculate the landed freight charges, multiply the prepaid freight amount by the direct transit cost. A transportation management system (TMS) makes allocating freight expenses to inventories easier.

What is inventory allocation in the context of supply chain management?

Inventory allocation in supply chain management refers to the strategic distribution and tracking of various inventory items, including finished products, components, and raw materials, across different locations within a company’s network, such as warehouses, distribution centres, factories, and physical stores. 

Why is inventory allocation important in ecommerce businesses?

Inventory allocation is crucial for ecommerce businesses because it helps prevent overstocking and under-stocking of products.

What factors affect inventory allocation decisions?

Several factors influence inventory allocation decisions, including demand forecasting, inventory availability, allocation rules (e.g., FIFO or LIFO), lead time, accuracy of inventory data, warehouse availability, and variation in storage charges.

What challenges are associated with inventory allocation?

Inventory allocation can be challenging without proper technology and systems. Without real-time visibility into inventory, decisions about storage, reordering, and production may become guesswork. 

How does inventory allocation contribute to cost savings in supply chain management?

Efficient inventory allocation helps businesses reduce costs by avoiding overstocking, optimizing storage space, preventing product depreciation, and minimising shipping expenses.

Shraddha Thuwal

Shraddha Thuwal

Shraddha Thuwal worked as a content writer at WareIQ. She actively contributes to the creation of blog posts centered on eCommerce operations, fulfillment, and shipping, in addition to providing insights on various strategies and techniques tailored for eCommerce sellers. With an impressive track record, Shraddha boasts over two years of content writing experience, spanning a spectrum of industries including logistics, supply chain, and media.

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