Also called allocated stock, allocated inventory is a warehousing term indicating the number of units a firm keeps aside in inventory for a specific retail store, customer or any other purpose. The allocated goods are not available for sale to other clients. For example, if a firm has 100 (total) units in its inventory, with 25 units being allocated, it means the firm can only actually sell 75 units (non-allocated inventory) in the open market. By the way, allocated inventory is also known by a few other names such as committed inventory, committed quantity, reserved stock, and quantity allocated. Also, allocated inventory and safety stock are not the same.
Hard and Soft Allocation
Allocated inventory, at times, could be used for a purpose it was not originally intended for. Let us understand this with an example. There are 30 units in allocated inventory and 25 units in non-allocated or available inventory. The 30 units are set aside for customer X who needs the goods to be delivered in three weeks. And then there is a new customer, customer Y, who needs 40 units in a week. By the way, fresh stock of 50 units is expected to arrive after two weeks.
But since the inventory currently only has 50 units in total (available and allocated), the seller can choose to borrow some units from the inventory allocated for customer Y and pick some up from the ‘available’ lot to process customer Y’s order. Or it could ask customer Y to wait for a couple of weeks for fresh stocks to arrive.
Inventory allocation could be ‘hard’ or ‘soft’. Hard allocation is essentially a seller choosing not to borrow any units from the allocated inventory. Soft allocation, on the other hand, is the seller borrowing units to fulfil the order of a customer with a fast-approaching or shorter deadline and then using freshly arrived stock to replenish allocated inventory.
There are pros and cons to both the approaches. With hard allocation, the seller can be confident about serving the customer for whom the goods are allocated. But it could also end up miffing the customer who needs the order to be processed quickly and cannot wait for long. Soft allocation helps a seller balance things out, but there is an inherent risk attached to it. If fresh stock arrival gets delayed, the seller would then may not be able to process the order of the customer who originally had the stock allocated.