A model and solution approach for store-wide shelf space allocation

Abstract

Store space is limited and one of the most costly resources of retailers. Retailers have to apportion available store space among the individual product categories of a store and therefore assign a certain share of shelf space to each category. Assigning more shelf space to one category requires reducing the number of shelves for another category as total space is limited. Reducing available shelf space in turn decreases assortment size and lessens the presentation quantity of products and vice versa. Both affect the demand of products and ultimately the profitability of the entire category such that the profit contribution of a category depends on its shelf size. This interrelation between category sizes and store profits needs to be taken into account for the shelf space assignment to categories and the space allocation for individual products.We introduce a store-wide shelf space model that optimizes shelf space assignment for categories based on the profit contribution of the corresponding product allocations. We decompose the problem into two hierarchically interlinked subproblems and show that the solution approach suggested works efficiently and provides solutions that are applicable to large problems in retail practice. In a case study with a major European retailer, we show that profits at stores can be improved by 3.2% using our approach. Further, we use simulated data to generalize the findings and derive managerial insights.