Decision support for managing assortments, shelf space, and replenishment in retail

Abstract

Efficiently managing retail space is critical as the increase in product variety is in conflict with limited shelf space and instore replenishment constraints. This paper develops a general framework for retail space management and presents a decision support model with the related problems within the framework of optimizing assortment, shelf space assignment and replenishment. An integrative approach to these planning problems becomes particularly relevant for fast-moving consumer goods and groceries, where stores are regularly replenished from distribution centers. The planning problem at hand is a multi-product shelf space allocation problem where demand is a composite function of the shelf space allocated and assortment-related demand substitution, and actual replenishment practices from retail are incorporated. The model developed extends existing models of shelf space management by jointly considering space-elastic demand and assortment-based substitution and integrating restocking constraints. For the latter, we consider real-world replenishment processes of retailers that distinguish between period-based and ad-hoc replenishment from the backroom. We develop three solution approaches that are based on efficient pre-processing and a nonlinear binary integer programming formulation of the problem. The computation tests based on retail data show the efficiency of the solution approaches in terms of computation time and solution quality. We reveal the improvement in profit levels that can be achieved from integrating assortments, shelf space planning and replenishment where challenges arise in obtaining feasible solutions with limited shelf space and replenishment constraints. We also use sensitivity analyses to demonstrate the high impact of replenishment constraints on profits and solution structures.