Assortment, Shelf Space and Inventory Planning

Retailers need to cost-efficiently manage the complexity of satisfying consumer demand with shelf inventory by determining the interdependent problems of assortment size, shelf space assignment and shelf replenishment. Retail shelf space assignment has demand and inventory effects, as already Whitin (1957) noted: “For retail stores (…) an increase in inventory may bring about increased sales of some items. On the other hand, an increased inventory might lead to a decrease in sales of other items.” Hence, the more space and inventory is assigned to products, the higher the demand (= space-elastic demand). Furthermore, retailers need to solve the trade-off decision of either holding too much inventory, resulting in tied capital, or keeping an inventory that is too low, requiring frequent restocking. Retailers are constrained in shelf replenishment due limitations on the shelf merchandizers available to immediately fill the shelves after stock out and the expensive handling costs within stores (van Zelst et al. 2009). Proper control of retail costs requires the balancing of inventory, shelf space and instore handling costs (Curseu et al. 2009), especially as up to 48% of total logistics costs accrue in stores (Ketzenberg et al. 2002; Thonemann et al. 2005; Broekmeulen et al. 2006; Sternbeck and Kuhn 2010). For example, van Zelst et al. (2009) conclude that case pack sizes and the filling regime may deliver profit gains of 8 to 49%. While there is evidence of consumer response and cost implications, “less is known about how to translate this evidence into profitable strategies” (Kopalle et al. 2009, p.62). As we will see in the literature review, traditional shelf space management models focus on the space assignment and assume “efficient inventory management systems.” In other words, they decouple the decision of shelf space assignment from replenishment, as most optimization models focus primarily on the demand side and less on the cost side. In addition, they assume that each product is restocked instantaneously and individually. Common practice in retail, however, is to conduct two types of shelf refilling: