The Retailer’s Stock-Keeping Unit Allocation Problem

Abstract

Increase in competition is witnessing the twin trends of product price erosion and product proliferation. Retailers cater to the price sensitive customer by providing standard low-priced products. They also cater to the customer segments that are willing to pay a premium for customisation by offering customised extensions of the standard product. While the profit margin for a standard product is generally low and the profit depends on volumes, its customised extensions carry higher profit margins. However, the standard product typically has longer shelf life while its customised extensions are promoted as flavours of the season and have short shelf lives. Examples of this are (i) breakfast cereal (standard product) with flavours for different climatic seasons, (ii) chocolate (standard product) with extensions for different occasions like vacation and festivals and (iii) sportswear (standard product) with flavours for different game seasons/occasions like basketball season, cricket World-Cup and Olympic Games. Increase in customised extensions results in increase in demand uncertainty and higher inaccuracy in forecasting demand for individual stock-keeping units (SKUs). This in turn implies higher possibility of stock-outs or oversupply.