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Product Allocation Planning - Managing allocation parameters

Continuing from my previous post, what questions come to mind when one thinks of a finished good product allocation-planning tool?

Well, one of the first question is how does the tool ensure right amount of supply is being allocated to the various demand channels, and how does it share supply when faced with a supply constraint?

This presents us with the two important aspects of product allocation planning, that is, Planning Strategy and Managing Supply Constraints. I'll focus on the first aspect in this post.

Setting up the allocation planning strategy

The supply gets distributed based on the setup of allocation parameters. This in turn depends on the mid term sales strategy and the product life cycle stage. I have tried to laid down a sequence of the basic and important strategies that need to be arrived at:

One of the first steps is deciding on what level of detail you want the allocation to be done. The allocation plan can range from a global view of demand and supply to a refined, customer specific level that considers country or sales area specific supply and demands. It is a good practice to start from a global allocation plan that is based on global product and sales strategy, and gives an allocation across geographies and sales channels. This is further refined to geography or channel specific allocation plan versions that are derived from the global allocation plan. This can be further broken down to customer/customer group specific plans that are eventually communicated to the ATP module of the OM system. In order to implement this, the tool must be able to derive a supply projection at various levels of aggregation

The next important step to start allocation planning is deriving the right set of groupings you want to allocate for. For e.g.: It is imperative to have an individual allocation plan for your top 20% customers in a particular sales area, but the rest 80% can be clubbed in a sets of tier 1, 2 and 3 customers. Similarly, an individual allocation plan could be created for geographies like USA, versus a combined allocation plan for a set of geographies like the South Americas.

Following these two decisions, arriving at the right amount of supply for a sales channel or customer in a particular week is the most important strategy to drive the allocation plan. This is usually based on targets days/weeks of inventory that are derived keeping in view the sales plans, customer importance and delivery lead times. The allocation quantity for a given week for a customer or channel would be the average sales spreading across the target inventory weeks, and netting out whatever inventory the customer or channel already holds.

Setting allocation priorities is the next key parameter. Depending on the level of allocation plan being derived, these priorities are applied among various levels, for e.g.: various sales channels or geographies, or even at the customer level. The tool should start distributing supply to allocation sets in the order of priorities defined, so that the higher priority allocation sets get satisfied first.

In the attached diagram I have presented a view on setting up allocation plan parameters based on product sales geographies, revenues and number of customers


While the discussed parameters are presented as sequential, in situations they can be interdependent when defining an allocation strategy, and need to be refined on a periodic basis to keep up with changing business scenarios. In my coming posts I will continue more on allocation parameters and focus on strategies to manage supply constraints... Looking forward to your thoughts


The article provides good insight into allocation managemen from sales perspective. The allocation percentage across sales channels/geographies are primarily depended upon the sales strategy. But the real challenage faced by business from supply constraints perspective is at what level the allocation is done. The allocation of suppy can be at Product families or Product mix. The allocation should ideally be close to what the products can be physically stored. By making the allocation at the correct level, the ATP can be better managed when the actual orders flow in from sales channels or group of customers. The allocation parameter does influence the supply constraints. The closer the allocations are planned at the stock keeping level, the Sales and Operations team would be in a better position to monitor the execution process

Your point is absolutely correct.. Allocation plans closer to the SKU level are better in terms of accuracy to plan and execute

Two factors to be considered here:
1. Accuracy of demand forecast at SKU level: To be able to plan allocations at SKU level there needs to be an accurate demand forecast at that level. You could also "re-judge" the demand forecast (as you are closer to execution horizon) before feeding into allocation planning
2. Assortment of SKUs offered: The sheer range of your product mix can be another factor, as you would need to setup allocation parameters for as many SKUs. This can be alleviated partially by setting up parameters at a product family level, with overrides for certain SKUs

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