Abstract
Shelf-space optimization models support retailers in making optimal shelf-space decisions. They determine the number of facings for each item included in an assortment. One common characteristic of these models is that they do not account for in-store replenishment processes. However, the two areas of shelf-space planning and in-store replenishment are strongly interrelated. Keeping more shelf stock of an item increases the demand for it due to higher visibility, permits decreased replenishment frequencies and increases inventory holding costs. However, because space is limited, it also requires the reduction of shelf space for other items, which then deplete faster and must be reordered and replenished more often. Furthermore, the possibility of keeping stock of certain items in the backroom instead of the showroom allows for more showroom shelf space for other items, but also generates additional replenishment costs for the items kept in the backroom. The joint optimization of both shelf-space decisions and replenishment processes has not been sufficiently addressed in the existing literature. To quantify the cost associated with the relevant in-store replenishment processes, we conducted a time and motion study for a German grocery retailer. Based on these insights, we propose an optimization model that addresses the mutual dependence of shelf-space decisions and replenishment processes. The model optimizes retail profits by determining the optimum number of facings, the optimum display orientation of items, and the optimum order frequencies, while accounting for space-elasticity effects as well as limited shelf and backroom space. Applying our model to the grocery retailer’s canned foods category, we found a profit potential of about 29%. We further apply our model to randomly generated data and show that it can be solved to optimality within very short run times, even for large-scale problem instances. Finally, we use the model to show the impact of backroom space availability and replenishment cost on retail profits and solution structures. Based on the insights gained from the application of our model, the grocery retailer has decided to change its current approach to shelf-space decisions and in-store replenishment planning.
Highlights
Retailers use shelves to offer their products to customers
(3) Backroom replenishment Refers to the processes that occur when items that did not fit on the shelf are returned to the backroom, where they are stored for later replenishment
Because we aim to investigate the interdependencies between shelfspace and reorder planning and its consequences on direct and indirect replenishment, we follow the majority of contributions and consider a single showroom shelf, i.e., we do not account for different shelf levels and assume the shelf consists of one level with a one-dimensional space S
Summary
Retailers use shelves to offer their products to customers. In doing so, they must decide how much shelf space to allocate to which item. Items that do not fit onto the showroom shelf space are stored in the backroom, from where shelves are later replenished (i.e., indirect replenishment from backroom) Both decisions, i.e., shelf space and reordering, are interrelated, because, e.g., to meet customer demand, a retailer has the option of increasing the shelf quantity and decreasing the order frequency for a specific item, or vice versa. Besides product margins and demand effects, the shelf-space planner should consider options for arranging items on the shelf, in-store replenishment frequencies and costs, and the availability of a backroom for replenishment. To investigate the above-mentioned relationships, we conducted a time and motion study for a German grocery retailer and identified both the relevant in-store replenishment processes and the associated costs Building on these insights, we develop an optimization model that simultaneously optimizes shelf-space and in-store replenishment decisions while accounting for space-elastic demand as well as limited showroom and backroom space.
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