Inventory Segmentation: Benefits, Strategies, and Best Practices

Inventory Segmentation: Benefits, Strategies, and Best Practices

man managing inventory in a warehouse

Most company leaders would agree that managing inventory over the last few years hasn’t been easy. They faced inventory shortages during 2020 and 2021, followed by peak inventory levels in 2022 once the supply chain disruptions subsided. With retailers focusing on right sizing their inventory, they more than ever need to ensure that demand driven by their top criteria is prioritized without compromising on other demand channels.

One critical component of achieving this goal is optimized inventory management through inventory segmentation. Whether you’re a retailer with one hundred store locations or a manufacturing company with a few large distribution centers, inventory segmentation impacts customer satisfaction, operational costs, and overall business success.

In this article, we’ll dive more into inventory segmentation as a strategy, uncover the benefits it offers, and provide tips for effective implementation.

What is inventory segmentation?

Inventory segmentation is typically a capability within an order management system (OMS) or inventory management system. This capability allows you to segment inventory based on predetermined criteria, ensuring inventory is appropriately allocated based on your business requirements.

For example, a retailer sells towels for both wholesale and individual sale purchases. Since the wholesale business is a large proportion of the business, the retailer may want to make sure the wholesale orders are always given priority. They could create two inventory segments, setting aside 80% for wholesale and 20% for individual sale purchases.

Inventory segmentation strategies

You can segment inventory in several ways based on your specific business goals and customer demands. As you’re creating your strategy, we recommend following the below tips.

Have an accurate demand forecast

In order to segment accurately, it is a prerequisite to have an accurate demand forecast that considers segmentation. Segmenting incorrectly can lead to missed business in one segment while having inventory left over in another segment.

Define your key segments

Your key segments will depend on your business. Do you want to ensure that your top tier customers are always prioritized, or is your business catering to multiple channels and you want to ensure adequate inventory is set aside for each channel?

Examples of segmentation criteria:

  • Customer: Tailoring inventory strategies to meet the needs of different customer groups or market segments.
  • Channel: Segmenting inventory based on sales channels to differentiate between stock allocated for in-store sales, online marketplaces, and eCommerce site sales.
  • Fulfillment Method: Segmenting Inventory for In-Store Pickup vs Direct Ship.
  • Subscription: Segmenting inventory based on whether the order is for a subscription to ensure subscription orders are always honored.

Set the number of segments you would like to use

Some retailers will want to segment by more than one criterion. For example, they may segment by channel as well as fulfillment method. Remember that the more segments you use, the more complex it becomes to determine the ideal breakdown across segments.

Determine the percentages you would like to apply to the segments

You should determine the percentage you want to set aside for each segment. For example, 70% for online marketplaces and 30% for direct orders.

Create granular criteria for segmentation

Some product categories require their own inventory segments. For example, say you sell backpacks and bicycles and offer in-store pickup or home delivery. For backpacks, you could set 50% of inventory aside for in-store pickup and 50% for home delivery. But for bicycles, you could set 80% for in-store pickup and 20% for home delivery. Another example is seasonal or regional products. For example, if you sell winter boots, you could segment inventory at locations in the Northeast differently than locations in the Southeast region.

Benefits of inventory segmentation

Inventory segmentation empowers businesses to tailor their order management and supply chain processes, which ultimately positively impacts other parts of the business. Below are the key benefits of inventory segmentation:

  • Protect Revenue: Ensure that segments that you need to service have adequate inventory to fulfill orders from that segment.
  • Improved Service Levels for Customers: Customers may shop by specific channels, have preferred fulfillment methods, or be your most loyal shoppers. By segmenting accurately, you can ensure availability — leading to higher customer satisfaction.
  • Enhanced Demand Forecasting: Categorizing inventory based on demand patterns in segments can augment Demand forecasts.
  • Balance Priorities: Inventory segmentation can help balance competing criteria. For example, a B2B customer has three main clients they supply. While they want to prioritize their top client in the case of insufficient inventory, they also wants to ensure their other two clients receive inventory as well.

Here’s a breakdown of how this could look for 20,000 rolls of printer paper rolls available:

Client A orders 20,000 rolls

Client B orders 10,000 rolls

Client C orders 5,000 rolls

A segmentation of 50%, 25%, and 25% ensures that each client gets some units of the paper rolls instead of only client A getting all 20,000 rolls.

How to implement an inventory segmentation strategy

Before diving into your order management or inventory management system and tagging inventory for various segments, it’s best to collaborate with other functions and establish objectives.

Planning and criteria definition

Begin with thorough data analysis to identify relevant criteria for segmentation. Ensure that the criteria you select aligns with your business goals. You can always run pilot tests to refine your criteria and ensure they work effectively.

Implementation and management

To implement your inventory segmentation strategy, you’ll need an order management or inventory management system that can automate and streamline the segmentation process. Simultaneously, you’ll need visibility into each inventory segment and continuously monitor stock levels, turnover rates, and demand forecasts to ensure that each segment operates efficiently.

It’s crucial to align order management processes with the established segmentation criteria, enabling the prioritization of orders according to the unique characteristics of each segment.

Continuous improvement

Regularly reviewing and reassessing your strategy enables you to remain agile in response to evolving market dynamics and shifting business objectives. Engage cross-functional teams in the implementation and evaluation processes, fostering collaborative efforts that yield holistic insights and drive effective execution. Refine your segmentation criteria to align with changing demand patterns.

Inventory segmentation with Kibo

Kibo Order Management comes with inventory segmentation out-of-the-box, empowering customers to easily segment inventory based on specific criteria and optimize inventory allocation for multi-channel sales. The inventory segmentation UI was built for business users, giving them the flexibility to tailor and evolve their strategy based on business objectives and customer demand.

Kibo’s business-friendly UI allows users to:

  • Segment inventory based on criteria that best meet your business needs, such as specific channels, customer groups, or fulfillment methods.
  • Conveniently set percentages by segments that get applied across products in your location network.
  • Combine tag values to achieve granular segmentation. For instance, items can be tagged by Customer Tier and Fulfillment Type, such as a shirt tagged as ‘Platinum Customers’ and ‘BOPIS’ (Buy Online, Pick Up In Store).
  • Dedicated workflows for customer service representatives (CSRs) to set tags when creating orders, ensuring that segmentation remains an accessible and practical tool for optimizing inventory management and order fulfillment processes.

Inventory segmentation stands as a transformative strategy that empowers organizations to navigate the complexities of supply chain dynamics, customer demand variability, and market volatility. By categorizing and managing inventory based on a range of criteria, businesses can unlock the potential for increased efficiency, reduced costs, and heightened customer satisfaction.

If you’d like to see how inventory segmentation can help your business, contact us to speak with an expert.