Goal programming model for grocery shelf space allocation

Abstract

The highly competitive grocery retail industry has annual sales of roughly half a trillion dollars in the US. While gross margins average about 28% of sales, net profits after taxes are only 1% industry-wide, causing retailers to continually search for operational improvements that increase profitability and improve customer service. One important decision that affects both of these goals is how to allocate shelf space to different products. This paper addresses the specific problem of how to allocate a fixed amount of shelf space to different products within a particular product category, such as pickles or jelly. A nonlinear integer goal programming formulation is proposed that considers both profitability and customer service factors. This decision support tool shows the tradeoffs between increased profitability and improved customer service, and allows the manager to make the best tradeoff for the situation. An alternate approach is also proposed.