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Eliminating the Risk of Stock Shortages with Inventory Allocation in Microsoft Dynamics 365 Supply Chain Management
Posted on: March 29, 2023 | By: Hope Jin | Microsoft Dynamics Manufacturing, Microsoft Dynamics AX/365
Businesses that operate across multiple channels and regions are faced with increasingly complex networks when it comes to fulfilling orders. In the event of supply shortages, it becomes crucial to effectively utilize limited stock across important channels, customer groups, regions, and promotions. To address these concerns, Microsoft Dynamics 365 Supply Chain Management Inventory Visibility service has the inventory allocation capability.
Inventory allocation allows for the virtual apportioning of on-hand stock during the sales operational planning process, before any actual sales occur. The primary objectives of inventory allocation are inventory protection, which involves protecting the allocated inventory from other allocations, reservations, or sales demands, and oversell control, which involves restricting allocated quantities to prevent overconsumption during actual sales transactions.
Incorporate inventory allocation into your sales planning
First, let’s define a few terms:
- Allocation group: The group that owns the allocation, such as a sales channel or a customer group.
- Allocation group value: The value of each allocation group. For example, “store” might be the value of the sales channel allocation group, and “VIP” might be the value of the customer allocation group.
- Allocation hierarchy: A combination of allocation groups in a hierarchy that determines how inventory is allocated to each group.
- Virtual common pool: The quantity of inventory that’s available to allocate.
Now let’s do a case study to see how a company might include inventory allocation in its sales planning process to optimize the distribution and fulfillment flow of limited stock.
Inventory allocation case study
Company A sells laptops both online and in-store in several countries. Supply chain disruptions severely affected manufacturing capacity of a popular model. The company needs to balance its fulfillment capability between its online and in-store channels in America and the United Kingdom.
- First, Company A determines allocation groups and allocation hierarchies in accordance with the company’s distribution strategy. The allocation is virtual based on current stock numbers. It doesn’t necessarily entail moving physical inventory. Company A does the initial segmentation and planning of allocation quantities in its planning system, but they could also do it manually based on historical experience. They decide to allocate first by regions (USA, UK) and then by sales channels (online, store).
- Next, Company A executes the allocation in the Inventory Visibility service to ring-fence each group’s allotted quantity. An allocation can’t be used by another group unless a reallocation adjustment is made.
The USA group is allotted 5,000 laptops and the UK group gets 3,000, leaving 2,000 as contingency in the virtual common pool. Of USA’s 5,000, 3,000 is allotted to its online sales channel group. No stock transfer is needed yet, since the actual sales transactions and fulfillment haven’t taken place.
- Next, the company fills its regional and channel demands through physical or soft consumption, ensuring that orders from allocation groups use their allocation.
A customer visits Company A’s USA website and purchases a laptop. The website checks the Inventory Visibility service, confirms that enough of the USA allocation for the online sales channel is available to fill the order, and allows the order to be processed. The consumed quantity can either be a soft reservation, as in this case, which deducts from the available stock level without affecting physical inventory quantity; or a deduction from physical stock, as in a “cash and carry” transaction in which the store inventory is directly consumed.
- Company A processes and ships the customer’s order as usual.
You can easily incorporate inventory allocation into your order fulfillment process. You’ll have more control over and visibility into your distribution and fulfillment network so that you can make better use of your on-hand stock. Inventory allocation goes beyond planning right through to the execution phase, ensuring allocated stock is protected and helping you keep your promises to sales channels, customer groups, and business partners.
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