Retail Shelf Space Management Model with Space-Elastic Demand and Consumer-Driven Substitution Effects

Abstract

Efficiently managing limited retail shelf space becomes critical as the increase in product variety is in conflict with limited shelf space and operational costs. This paper presents a multi-product shelf space management problem, where category demand is a composite function of shelf space allocated and demand substitution under replenishment constraints. We describe an innovative approach to solving a core retail planning question involving which products to offer and how much shelf space to assign items. Traditional shelf space models are extended in three directions. First, the model integrates substitution effects by modeling out-of-assortment substitution. Second, the model takes into account facing-dependent restocking constraints do avoid underfaced items and to reflect the actual retailers replenishment policy. Finally, a transformation of the MINLP into a specialized knapsack problem solves category problems of practical relevant sizes. The computation tests show the improvement of profit levels by reflecting more comprehensively the consumer behavior. Also, we show the high impact of cross-space and substitution effects, and replenishment constraints on profit and solution structure.