A store-oriented approach to determine order packaging quantities in grocery retailing

Abstract

Instore operations in bricks-and-mortar grocery retailing account for the highest share of operational logistics costs within the internal retail supply chain. The order packaging quantity (OPQ) is regarded as one important driver of instore logistics efficiency. We define the OPQ as the number of consumer units that are bundled into one order and distribution unit for supplying the individual stores. Therefore, the OPQ corresponds to the smallest possible order size and determines the possible granularity of order sizes with an impact on instore operations costs. In this paper, we develop a cost-minimization model including instore handling and inventory carrying costs to determine OPQs. The model developed builds on inventory management theory and is based on discrete probability distributions of consumer demand. We apply the model in an industry case study with real retail data for 39 stock keeping units and 1,180 stores of a European retail company. By applying the minimal-cost OPQ for all stores, the costs considered can be reduced by 9.4 %. This paper can be considered as a first in-depth analysis of the dormant instore efficiency potential in connection with adjusted OPQs that seems to be largely untapped in retail research and practice.