Power Query Merge based on conditions

1) Split your second table into three queries where each is filtered by your conditions (i.e., one table has customer, all, all; another has customer, state, all; etc.). Disable load on these tables

2) Now that you have a table for each scenario, you can do the appropriate correspoding merge. You can set the key(s) or remove duplicates to speed up merge.

3) Once joined, you can combine (append) the tables back together. This gives you all the invetory rows with warehouses. Remove warehouse rows that don't have any corresponding inventory. Don't load

4) use an antijoin with original Inventory table with #3 to get all your inventory rows without warehouses. Don't load

5) Combine (append) tables from #3 and #4 to get your complete InventoryWarehouses table. Load this table

The flow of all this will look like:

Queries:

CustomerWarehouses:
let
    Source = Table.FromRows(Json.Document(Binary.Decompress(Binary.FromText("i45WcnRyVnDO11PSUXJJzStLLQIynP2BRLihUqwOsrRTfmlOCpK8EVjexdUNKp+YkwMnw43Bku4eniiS/h4Ig9Hlwh2hhsYCAA==", BinaryEncoding.Base64), Compression.Deflate)), let _t = ((type nullable text) meta [Serialized.Text = true]) in type table [Customer = _t, City = _t, State = _t, Warehouse = _t])
in
    Source

Inventory:
let
    Source = Table.FromRows(Json.Document(Binary.Decompress(Binary.FromText("i45WMjQyNlHSUXLKKU1VSMrMTgWyHZ2cFZzz9YAsl9S8stQiIMPZXylWB6zYFMgLSk3BprakKD+zBMjy9YQpNgPy3ItSU/NgyiMio6DK/VLLFSLzi7JBzEiYenM0l7h7eEKVO+eklqXmJOalANn+HjD1FqiOcXF1gyoPSazMyS9CcYslulsQhqO5JRYA", BinaryEncoding.Base64), Compression.Deflate)), let _t = ((type nullable text) meta [Serialized.Text = true]) in type table [#"Serial No" = _t, Product = _t, Customer = _t, City = _t, State = _t])
in
    Source

CustomerAllAll:
let
    Source = CustomerWarehouses,
    Filter = Table.SelectRows(Source, each ([State] = "all") and ([City] = "all")),
    Distinct = Table.Distinct(Filter, {"Customer"}),
    MergeInv = Table.NestedJoin(Distinct, {"Customer"}, Inventory, {"Customer"}, "Inventory", JoinKind.LeftOuter)
in
    MergeInv

CustomerStateAll:
let
    Source = CustomerWarehouses,
    Filter = Table.SelectRows(Source, each ([City] = "all") and ([State] <> "all")),
    Distinct = Table.Distinct(Filter, {"Customer", "State"}),
    MergeInv = Table.NestedJoin(Distinct, {"Customer", "State"}, Inventory, {"Customer", "State"}, "Inventory", JoinKind.LeftOuter)
in
    MergeInv

CustomerStateCity:
let
    Source = CustomerWarehouses,
    Filter = Table.SelectRows(Source, each ([State] <> "all") and ([City] <> "all")),
    Distinct = Table.Distinct(Filter, {"Customer", "City", "State"}),
    MergeInv = Table.NestedJoin(Distinct, {"Customer", "State", "City"}, Inventory, {"Customer", "State", "City"}, "Inventory", JoinKind.LeftOuter)
in
    MergeInv

InventoryWithWarehouses:
let
    Source = Table.Combine({CustomerStateCity, CustomerStateAll, CustomerAllAll}),
    RemoveWHCols = Table.RemoveColumns(Source,{"Customer", "City", "State"}),
    ExpandInv = Table.ExpandTableColumn(RemoveWHCols, "Inventory", {"Serial No", "Product", "Customer", "City", "State"}, {"Serial No", "Product", "Customer", "City", "State"}),
    RemoveEmptyWH = Table.SelectRows(ExpandInv, each ([Customer] <> null))
in
    RemoveEmptyWH

InventoryNoWarehouses:
let
    Source = Table.NestedJoin(InventoryWithWarehouses, {"Serial No", "Product", "Customer", "City", "State"}, Inventory, {"Serial No", "Product", "Customer", "City", "State"}, "Inventory", JoinKind.RightAnti),
    RemoveWHCols = Table.RemoveColumns(Source,{"Warehouse", "Serial No", "Product", "Customer", "City", "State"}),
    ExpandInv = Table.ExpandTableColumn(RemoveWHCols, "Inventory", {"Serial No", "Product", "Customer", "City", "State"}, {"Serial No", "Product", "Customer", "City", "State"})
in
    ExpandInv

InventoryWarehouses:
let
    Source = Table.Combine({InventoryWithWarehouses, InventoryNoWarehouses})
in
    Source

Result:

Hello, Barbara. I am not sure about performance but give this a try

let
    customer = your_customers_table,
    inventory = your_inventory_table,
    cust_group = Table.Group(customer, {"Customer"}, {{"all", Table.ToRecords}}),
    cust_dict = Record.FromList(cust_group[all], cust_group[Customer]),
    fx_select = (dict, rec) =>
        [a = Record.FieldOrDefault(dict, rec[Customer], null),
        sel = if a = null then null else 
            List.Select(
                a, 
                (x) => 
                    (x[City] = "all" or x[City] = rec[City]) and 
                    (x[State] = "all" or x[State] = rec[State])
            ){0}?[Warehouse]?][sel],
    wh = Table.AddColumn(inventory, "Warehouse", (x) => fx_select(cust_dict, x))
in
    wh

let
    Source1 = Table.FromRows(Json.Document(Binary.Decompress(Binary.FromText("i45WcnRyVnDO11PSUXJJzStLLQIynP2BRLihUqwOsrRTfmlOCpK8EVjexdUNKp+YkwMnw43Bku4eniiS/h4Ig9Hlwh2hhsYCAA==", BinaryEncoding.Base64), Compression.Deflate)), let _t = ((type nullable text) meta [Serialized.Text = true]) in type table [Customer = _t, City = _t, State = _t, Warehouse = _t]),
    Source2 = Table.FromRows(Json.Document(Binary.Decompress(Binary.FromText("i45WMjQyNlHSUXLKKU1VSMrMTgWyHZ2cFZzz9YAsl9S8stQiIMPZXylWB6zYFMgLSk3BprakKD+zBMjy9YQpNgPy3ItSU/NgyiMio6DK/VLLFSLzi7JBzEiYenM0l7h7eEKVO+eklqXmJOalANn+HjD1FqiOcXF1gyoPSazMyS9CcYslulsQhqO5JRYA", BinaryEncoding.Base64), Compression.Deflate)), let _t = ((type nullable text) meta [Serialized.Text = true]) in type table [#"Serial No" = _t, Product = _t, Customer = _t, City = _t, State = _t]),
    Custom1=let a=Table.Buffer(Source1) in Table.AddColumn(Source2,"Warehouse",each let w1=a{[Customer=[Customer],State=[State],City=[City]]}?[Warehouse]?,w2=a{[Customer=[Customer],State=[State],City="all"]}?[Warehouse]?,w3=a{[Customer=[Customer],State="all",City="all"]}?[Warehouse]? in w1??w2??w3)
in
    Custom1