Inventory allocation, or the strategic distribution of stock across various locations, is key to avoiding lost revenue and optimizing your retail supply chain for a competitive advantage. Without it, you risk losing sales and watching profits dwindle.

Efficient inventory management balances availability with demand across retail locations or warehouses, helping you keep stock levels aligned with what customers actually want.

This guide outlines a successful inventory allocation strategy to help you determine optimal stocking levels, with tips on forecasting demand and automating the inventory management process. 

What is inventory allocation?

Inventory allocation is the distribution of products across storage locations and sales channels. It’s a supply chain management process that ensures the right products are available in the right places at the right time to meet customer demand.

Businesses of all sizes use inventory allocation, from retailers to wholesalers and online marketplaces. This process runs continuously—whether you’re launching new products, restocking inventory, or preparing for seasonal demand spikes.

Why are inventory allocation strategies important? 

Better cash flow management

Tying up too much capital in slow-moving inventory can strangle your cash flow. On the flip side, not having enough stock of popular items means missed sales. Proper inventory allocation helps you strike a better balance and maintain healthier accounting practices.

Increased operational efficiency

Smart inventory allocation streamlines your entire fulfillment process. When products are stored in the right quantities at the right locations, you can process orders faster, more accurately, and more cost-effectively. This is where artificial intelligence (AI) offers a significant edge. 

According to McKinsey, retailers using AI tools can reduce inventory levels by 20% to 30%. Modern AI-powered systems analyze vast datasets—including historical sales, lead times, supplier performance, and even external factors like weather patterns—to predict future demand and recommend optimal allocation and replenishment schedules automatically.

Improved customer satisfaction

Getting products to customers when and where they want them is essential for building loyalty and repeat business. Effective inventory allocation ensures that popular items are always in stock and readily available for quick shipping. 

More sales and reduced stockouts

Stockouts are a sales killer. Customers who can’t find what they’re looking for will likely shop elsewhere, sending potential revenue to competitors instead.

It’s estimated that retailers worldwide lose almost $1 trillion every year due to stockouts and overstock situations. Strategically allocating inventory can reduce inventory disruption and capture more sales opportunities.

Common challenges in inventory allocation

Common hurdles retailers face when allocating inventory include:

• Omnichannel complexity: If you sell online or in multiple locations, disconnected inventory management systems make it difficult to know where your stock is and how much inventory you’ll need. This can lead to overstocking in some locations or understocking in others. 
• Seasonality: Temporary spikes in customer demand (like holidays or sales events) make allocation harder to plan accurately. You might have an unexpected influx of foot traffic at one location during the town’s Christmas markets, for example, or fewer customers than usual if snow prevents people from shopping in-store. 
• Limited supply chain visibility: If you can’t see where inventory is or how fast it’s moving, it can be easily misallocated. The same applies to other areas of the supply chain, such as replenishment cycles. If restocking takes too long, you can’t adapt quickly to changes in demand or sales patterns.

💡Tip: Shopify’s unified data model funnels inventory data from every sales channel into one operating system—no patchy middleware, third-party integrations, or custom configurations required. An independent research firm found the average retailer saves 10 hours per month on inventory management with Shopify POS, and experiences roughly 1% improvement in annual GMV.

Six key inventory allocation strategies

Push strategy

Push allocation involves forecasting demand and proactively pushing inventory to various locations based on anticipated needs. Retailers use it when managing products with predictable demand or long lead times, like consumer packaged goods or seasonal products.

A sunscreen manufacturer, for example, might use the push allocation method to distribute large quantities of product to sunny regions before the summer season begins.

Pull strategy

Pull allocation is a demand-driven approach in which inventory is only ordered or moved when there is actual customer demand. It’s popular among retailers and manufacturers who deal with products that have unpredictable demand or short shelf lives.

For example, a clothing retailer using pull allocation might only restock a particular style of jeans when stock levels fall below a set threshold based on real-time sales data.

📚 Learn: Push vs. Pull Inventory: Choosing the Right Inventory System

Just-in-time (JIT)

Just-in-time (JIT) is an inventory allocation method that aims to have stock arrive precisely when it’s needed. It’s a favorite among organizations looking to cut carrying costs and improve cash flow. 

JIT is more effective when you have stable supply chains and predictable demand. An electronics manufacturer might use JIT allocation to receive components for a new smartphone model just as the assembly process is about to begin, for example.

First in, first out (FIFO)

First in, first out (FIFO) allocation ensures that the oldest inventory is sold or distributed first. This method is crucial for businesses handling perishable goods or products that can become obsolete over time. 

For example, a grocery store using FIFO allocation would place newer milk deliveries at the back of the refrigerator while moving older stock to the front, ensuring products are sold before their expiration dates.

Rules-based allocation

Rules-based allocation relies on predefined rules—such as sales volume, store size, or regional demand—to guide stock distribution.

For example, a clothing brand might set a rule to allocate 40% of a new jacket style to high-performing stores, 30% to medium performers, and 30% to low performers. When the shipment arrives, an automated inventory management system divides the stock among each location according to those rules.

Store and warehouse grading

Store and warehouse grading assigns grades to locations based on performance metrics such as sales volume, foot traffic, or order fulfillment speed. It’s a type of rule-based allocation that ensures top-performing locations receive more stock while still supporting smaller stores.

For example, a home furnishings retailer could give its locations the following grades and inventory allocations:

• Grade A: 750 units 
• Grade B: 300 units
• Grade C: 100 units

Key considerations for your allocation strategy

Demand forecasting

Demand ultimately shapes your allocation strategy. You must know which products customers want, where they want them, and when, so you can build an effective inventory plan. 

By analyzing sales data inside the same platform you use to run your business, you can identify patterns like:

• Product A sells 30% more in the Northeast during winter months.
• Product B has consistent demand year-round but spikes during promotions.
• Product C is slowly declining in popularity, except in certain regions.

These are insights you can act on. For example, you might allocate more winter gear to Northeastern warehouses in October, or ensure promotional items are well-stocked across all locations before a big sale.

💡Tip: AI-powered demand forecasting tools can combine first-party data with external data sources—such as weather patterns, market dynamics or customer behavior trends—to better predict demand. You can also use this insight to estimate economic order quantity (EOQ) and reduce inventory costs while meeting demand. 

Stock levels and safety stock

Stock levels are your inventory pulse, indicating what’s available, low, or overstocked. Key metrics include the reorder point (when to order more) and maximum stock (upper inventory limit).

For example, for your bestselling t-shirts, you might set the following:

• Reorder point: 50 units
• Maximum stock: 250 units

When stock hits 50, you order 200 more. 

But it’s not just about numbers. Different products need different approaches:

• Fast-moving items might have higher reorder points to prevent stockouts.
• Seasonal products could have fluctuating inventory levels throughout the year.
• Slow-moving, high-value items might have lower maximum stock to reduce tied-up capital.

Storage capacity and cost

When allocating inventory, consider the physical dimensions of products and how they fit into your available storage. You might need to prioritize allocating fast-moving items to locations with easy access (like next to your stockroom door), while slower-moving products can be stored in quieter areas. 

Additionally, consider the cost of storage at different locations. It might be more economical to allocate certain inventory to facilities with lower storage costs, provided it doesn’t negatively impact order fulfillment speed.

Lead times and fulfillment speed

Consider how your distribution affects delivery times. Storing inventory closer to your customers generally allows for faster shipping, but it may also increase overall storage costs.

You might also choose to allocate high-demand or time-sensitive products across multiple locations to ensure quick delivery to a wider customer base. For slower-moving items, it might make more sense to centralize inventory in fewer locations to reduce inventory storage costs.

Product lifecycle

When making allocation decisions, consider the production time and resource requirements for work-in-progress (WIP) items. 

You might need to reserve warehouse space and resources at specific locations to accommodate WIP inventory, which could influence how you distribute finished goods. Balancing WIP items across different production stages and locations can help maintain a smooth production flow and prevent bottlenecks.

Five inventory allocation best practices

1. Use automated inventory management software

Gone are the days of manual counts and guesswork. Automated inventory management systems eliminate the guesswork in tracking stock. 

Apps like Stocky by Shopify POS Pro seamlessly integrate with your point-of-sale (POS) system, offering real-time visibility into inventory status as items move in and out. You can effortlessly create purchase orders, manage stock transfers across retail locations, and conduct regular stock takes using barcode scanning. 

Smart POS analytics also provide insights to optimize your product mix, forecast demand, and suggest reorder points, helping you stay balanced between stockouts and overstock.

2. Calculate and maintain safety stock

Safety stock is the extra cushion of products you keep on hand to avoid stockouts during unexpected spikes in demand or supply chain hiccups. 

A basic formula to calculate safety stock is: 

(Maximum daily sales × maximum lead time) − (average daily sales × average lead time) = Safety stock

Consider factors like lead times, demand variability, stockout rates, and the cost of out-of-stock items versus the cost of holding extra inventory. While you don’t want to tie up too much capital in excess inventory, having a reasonable buffer can save you from lost sales and unhappy customers.

3. Use ABC analysis to prioritize products

ABC analysis categorizes inventory by its importance to your business, measuring the retail value of a product alongside how much of your inventory it makes up. Here’s how it works:

• A items: High-value products that represent a small portion of your inventory and contribute significantly to your revenue
• B items: Moderately valuable products that represent a moderate portion of your inventory
• C items: Low-value products that account for a large portion of your inventory and a small portion of your revenue

Using ABC analysis, you can prioritize your resources and attention. For example, you might keep higher safety stock levels for A items while adopting a leaner approach for C items. 

💡Tip: Shopify’s inventory reports can run an ABC analysis for you. Analyze inventory across all sales channels—including multiple retail stores, your ecommerce website, and social media storefronts—to find those most valuable to your business.

4. Align allocation with regional demand

When selling in multiple regions or markets, demand can vary from one area to another. Weather, local preferences, and cultural events can impact what sells where. Sales data and market trends can help you allocate inventory effectively. 

Shopify offers a powerful POS feature called fulfillable inventory to help with inventory allocation. You can control how your shipping settings affect which inventory is available to your customers based on their market and shipping location. 

For example, if you have different product lines for different regions, it ensures customers only see products available in their area. The fulfillable inventory feature also helps prevent overselling across markets and outside of shipping zones.

To use fulfillable inventory, your store needs to have at least one shipping profile with two or more shipping zone groups with different shipping origins, or have at least one location with pickup in store or local delivery.

5. Partner with a 3PL for distribution

A third-party logistics (3PL) provider can significantly improve how your business allocates inventory. These companies specialize in warehousing, fulfillment, and distribution, often with multiple warehouses and distribution centers to serve different regions. 

You can tap into a fulfillment service’s expertise and infrastructure without the hefty upfront costs of building your own. They can help you optimize your inventory placement, reduce shipping times and costs, and scale your operations more easily as your business grows.

Fortunately, you don’t need to look far for a 3PL provider. Shopify Fulfillment Network connects your store with Flexport, a leading logistics company that manages the entire process for you. With Shopify’s flexible platform, external system integrators can easily connect into Shopify, maintaining real-time data visibility as your inventory moves across locations and channels.

Stay ahead of inventory challenges with Shopify

Shopify offers powerful native tools and integrations to help you manage inventory more efficiently. From the Stocky app for real-time inventory tracking to the Shopify Fulfillment Network for streamlined logistics, these solutions improve customer satisfaction, boost sales, and streamline operations.

Don’t let poor inventory management hold your business back. A leading independent research firm found that on average, Shopify’s unified data model helps retailers experience:

• 22% better total cost of ownership (TCO)
• 25% lower annual software subscription and maintenance costs
• 8.9% uplift in their gross merchandise value 

“Shopify POS gives us real-time visibility into stock and operations,” says Pierre Asteix, operations director at Weebot. “Our team can see exactly where a product is and manage transfers easily, which has been essential for running four service centers smoothly.”

This article originally appeared on Shopify and is available here for further discovery.