Merchandise allocation is the step that splits the stock a retailer has bought across its stores, and across each size and colour, from forecasts of what each store will sell. It is also called store allocation. It comes after merchandise planning, which decides what to buy. Allocation decides where each piece goes.
Allocation is harder than it sounds. Two stores of the same chain can sell very different sizes. A store near a college may sell more small sizes, and a store in an office district may sell more large ones. If a store receives the wrong sizes, it runs out of the sizes people want while the other sizes stay on the shelf. Those leftover sizes must later be sold at a discount.
The software uses a demand forecast for each store, each item and each size. It also knows how much stock each store can hold. A good allocation does not send all the stock at once. It keeps part of the stock in the warehouse, and later sends it to the stores that sell fastest. This second round is a form of demand forecasting and replenishment.
Take, for example, a menswear chain with 200 stores that has bought 30,000 formal shirts of one new style for the wedding season. The software sends 21,000 shirts to the stores in the first round, which is 70% of the stock. It keeps 9,000 in the warehouse. Each store's share depends on its forecast. A large store on a busy shopping street in Bengaluru receives 240 shirts. A small store in a district town receives 60. Within each store, the shirts are split by size. For instance, the large store gets 30 in size 38, 70 in size 40, 80 in size 42 and 60 in size 44, because that is how its past sales of formal shirts were spread across sizes. After two weeks, the software sees which stores are selling fastest, and sends them more shirts from the 9,000 kept back.
The allocation becomes a list of orders for the warehouse. The warehouse management system (WMS) tells the workers which cartons to pack for which store, and in what order.
Without allocation software, the chain might split the shirts equally, 150 to each store. The large stores would run out in a week, while the small stores held shirts they could not sell. The chain would then have to move stock between stores, which costs money, or cut prices early.