Product line selection of fast-moving consumer goods

Abstract

The fast-moving consumer goods sector relies on economies of scale. However, its assortments have been overextended as a means of market share appropriation and top-line growth. This paper studies the selection of the optimal set of products for fast-moving consumer goods producers to offer, as there is no previous model for product line selection that satisfies the requirements of the sector. Our mixed-integer programming model combines a multi-category attraction model with a capacitated lot-sizing problem, shared setups and safety stock. The multi-category attraction model predicts how the demand for each product responds to changes within the assortment. The capacitated lot-sizing problem allows us to account for the indirect production costs associated with different assortments. As seasonality is prevalent in consumer goods sales, the production plan optimally weights the trade-off between stocking finished goods from a long run with performing shorter runs with additional setups. Finally, the safety stock extension addresses the effect of the demand uncertainty associated with each assortment. With the computational experiments, we assess the value of our approach using data based on a real case. Our findings suggest that the benefits of a tailored approach are at their highest in scenarios typical fast-moving consumer goods industry: when capacity is tight, demand exhibits seasonal patterns and high service levels are required. This also occurs when the firm has a strong competitive position and consumer price-sensitivity is low. By testing the approach in two real-world instances, we show that this decision should not be made based on the current myopic industry practices. Lastly, our approach obtains profits of up to 9.4% higher than the current state-of-the-art models for product line selection.