A shopper in Seattle orders a pair of running shoes. Whether that package arrives quickly and cheaply depends on a choice made weeks earlier: which warehouse was holding the shoes. Adding more warehouses doesn’t solve this on its own. Spread stock badly, and you end up with higher costs, empty shelves in one place and overflowing ones in another. Placed well, though, stock can be nearer the people who buy it.
Inventory allocation and order routing are different decisions
People often confuse the two terms, but they describe different decisions.
Allocation is the planning step. Before any order arrives, you decide which products each warehouse will hold and how many units of each. Routing happens afterwards. When a customer places an order, the system or the team picks a location with stock to fill it.
Think of a restaurant kitchen. Allocation is stocking the shelves before service starts. Routing is deciding which cook handles each ticket. Put simply, allocation sets up the options and routing chooses among them. Weak allocation limits routing because no rule can ship a product from a warehouse that doesn’t have it.
Use demand data and sales velocity to place stock.
Start with what the sales history says. Sales velocity, meaning how fast a product sells, is the first input. Fast sellers with steady demand are good candidates for multiple locations. An item that sells only a couple of times a month usually belongs in one location.
Several other inputs also matter: seasonality, margin, restock lead time, and how often a product has run out. Take a brand with warehouses in New Jersey and California. Its top water bottle sells steadily in both regions, so both sites hold it. A hydration pack that sells mostly to hikers in summer might sit only in California during those months. Let each product’s own numbers decide, rather than copying one layout across the catalog.
Factor in where customers live
Where orders come from matters as much as how many arrive. Carriers price parcels by zone. In the USPS system, zones are based on the distance between the origin ZIP code and the destination ZIP code, and higher zones generally cost more to ship to. Shorter trips usually mean lower postage and fewer days in transit.
So if a third of your orders come from the West Coast and all your stock sits in New Jersey, you pay for distance on every one of those parcels. A second location may help, but only if the demand supports it.
Demand also shifts. A layout that suited last spring can stop fitting after a marketing push in another region, so allocation needs regular review, and moving stock between warehouses has a cost of its own.
Buyer expectations also play a part. A buyer waiting on a bulky item may accept a slower delivery than one who needs a phone charger by the weekend, and the plan should reflect that.
The risk of stocking every SKU in every warehouse
Copying the full catalog to every site feels safe, but it comes at a cost. Each location needs its own safety stock, the buffer held in case demand jumps, so the same buffer gets bought several times over. Slow sellers pile up where they rarely sell, and cash that could fund new products sits on shelves. Across global retail, IHL Group puts the yearly cost of out-of-stocks and overstocks at about $1.7 trillion. The same imbalance can appear inside one brand: too much of a product in one place and too little in another.
Good inventory allocation works the other way around. It builds the network around demand, so each location holds what its customers order and slower items stay in fewer places.
Decide where each order ships from
Once stock is placed, routing takes over. For each order, the system considers which locations have the item, where the customer lives, which carriers and service levels are available, what each option costs, and practical limits such as cut-off times. The best choice is often the closest location with stock, but not always. A slightly farther warehouse may be cheaper, or the nearest one may be holding its last units for other orders.
Routing also helps avoid split shipments, where one order leaves in two boxes from two sites. Those can cost more to ship and arrive on different days. Routing rules can prefer a single location that holds the whole order when one exists.
Measure whether the network is working.
A multi-warehouse setup needs regular checking after launch. Track regional delivery times, shipping cost per order, stockouts, split shipments, inventory turnover and aged stock. Review them monthly at first, then seasonally once the pattern settles. Compare each figure with the period before you changed placement, so you can see what moved. For example, if shipping costs rise while stockouts fall, you may be paying extra to keep products available, and the plan deserves another look.
Why you need both
Inventory allocation and order routing work together to improve delivery efficiency and control shipping costs. Allocation determines which products are stored at each warehouse, while routing decides which location should fulfill an order. Even well-distributed inventory can lead to unnecessary shipping expenses if orders are routed inefficiently. Similarly, effective routing cannot compensate for products being stocked in the wrong locations. Businesses can manage these processes using spreadsheets, inventory management systems or automated order routing tools, depending on their operational needs. The key is to use demand data to position stock strategically and real-time inventory information to fulfill orders efficiently.