RETAIL GLOSSARY

# Allocation Model

A mathematical or statistical model used to optimise inventory allocation decisions, considering factors such as sales history, store capacity, and customer preferences.

## What is an Allocation Model?

An allocation model is a systematic approach used by retailers to distribute inventory across different stores or locations. It involves analysing data, establishing allocation rules, and determining the quantities of products to allocate. The model aims to optimise sales, minimise stock issues, and improve customer satisfaction.

## How an Allocation Model works

• Data analysis: The allocation model begins by analysing historical sales data, market trends, customer demand patterns, and other relevant information. This data helps identify key factors that influence product allocation decisions.

• Allocation rules: Based on the data analysis, specific allocation rules are established. These rules define how inventory will be distributed among different stores or locations. Factors such as store size, sales performance, geographic location, customer demographics, and product popularity may be considered when setting these rules.

• Inventory allocation: Using the established rules, the allocation model determines the quantities of products to be allocated to each store or location. The model takes into account factors like product availability, store capacity, anticipated demand, and desired stock levels.

• Allocation adjustments: The allocation model is flexible and allows for adjustments based on changing circumstances. For example, if a particular store is experiencing higher-than-expected demand, the model may allocate more inventory to meet the increased need.

• Monitoring and evaluation: The performance of the allocation model is continuously monitored and evaluated. Key metrics such as sales, inventory turnover, stockouts, and customer satisfaction are analysed to assess the effectiveness of the allocation decisions.
The ultimate goal of an allocation model is to ensure that the right products are available in the right quantities and locations to meet customer demand, optimise sales, minimise stockouts, and maximise profitability.

## Pros of an Allocation Model

1. Optimised inventory distribution: An allocation model helps optimise the distribution of inventory across different stores or locations. By considering factors such as sales performance, store capacity, and customer demand, the model ensures that the right products are available in the right places at the right time. This leads to improved product availability, reduced stockouts, and increased sales.
2. Efficient resource allocation: With an allocation model, resources such as inventory and manpower can be allocated more efficiently. By accurately forecasting demand and aligning it with inventory levels, the model helps minimise excess inventory and reduce carrying costs. It also allows for effective utilisation of staff and resources by allocating them to stores or locations with higher demand.
3. Data-driven decision-making: Allocation models rely on data analysis and statistical techniques to make allocation decisions. By using historical sales data, market trends, and other relevant information, the model provides a data-driven approach to decision-making. This reduces reliance on subjective judgment and gut feelings, resulting in more accurate and objective allocation decisions.

## Cons of an Allocation Model

1. Complex implementation: Implementing an allocation model can be complex and require significant time and resources. It involves collecting and analysing large amounts of data, developing mathematical models, and integrating the model into existing systems and processes. This complexity can make implementation challenging and time-consuming.
2. Data requirements and accuracy: Allocation models heavily rely on accurate and up-to-date data to make effective allocation decisions. This includes historical sales data, inventory levels, store-specific information, and external market data. Ensuring the availability and accuracy of this data can be a challenge, especially in retail environments with multiple data sources and systems.
3. Potential for errors and limitations: Allocation models are based on assumptions and mathematical algorithms, which may have limitations or inherent biases. There is a possibility of errors or inaccuracies in the model's calculations or outputs. Additionally, the model may not account for all relevant factors that can influence product allocation, such as local market conditions, customer preferences, or unforeseen events. Regular monitoring, validation, and adjustment of the model are necessary to mitigate these limitations.

## FAQ

Below you will find answers to common questions
How can an allocation model help optimise inventory distribution across different store locations?
An allocation model uses historical sales data, inventory levels, and other relevant factors to determine the optimal distribution of products across store locations. By analysing past performance and considering factors like store-specific attributes, customer demand patterns, and market trends, the model can generate allocation recommendations that help maximise sales, minimise stockouts, and improve overall inventory efficiency.
How does an allocation model handle new product introductions or seasonal variations?
An allocation model can be designed to accommodate new product introductions or seasonal variations by considering factors like product category, time of year, and anticipated demand patterns. For new products, the model can use similar product attributes or historical data from comparable items to make initial allocation recommendations. Similarly, for seasonal variations, the model can leverage historical sales patterns during similar seasons to adjust allocation quantities accordingly, ensuring appropriate product availability during peak demand periods.