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Integrating replenishment into shelf planning maximizes retail profits

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Published on Tuesday, 01 August 2017

A model maximizes retail profits while considering costs for direct and backroom replenishment, cost for inventory, limited showroom and backroom space as well as space-elastic demand.

In their article “Effect of replenishment and backroom on retail shelf-space planning” published in Business and Research, Alexander Hübner, University of Luxembourg and Kai Schaal, Catholic University of Eichstätt-Ingolstadt show how and under which circumstances retailer can benefit from optimising shelf-space.

Shelf-space optimization models support retailers in making optimal shelf-space decisions. They determine the number of facings for each item included in an assortment. One common characteristic of these models is that they do not account for in-store replenishment processes. However, the two areas of shelf-space planning and in-store replenishment are strongly interrelated.

Keeping more shelf stock of an item increases the demand for it due to higher visibility, permits decreased replenishment frequencies and increases inventory holding costs. However, because space is limited, it also requires the reduction of shelf space for other items, which then deplete faster and must be reordered and replenished more often. Furthermore, the possibility of keeping stock of certain items in the backroom instead of the showroom allows for more showroom shelf space for other items, but also generates additional replenishment costs for the items kept in the backroom.

To quantify the cost associated with the relevant in-store replenishment processes, the authors conducted a time and motion study for a German grocery retailer. Applying their model to the grocery retailer’s canned foods category, they found a profit potential of about 29%.

They further apply their model to randomly generated data and show that it can be solved to optimality within very short run times, even for large-scale problem instances.
Finally, they use the model to show the impact of backroom space availability and replenishment cost on retail profits and solution structures.

Based on the insights gained from the application of our model, the grocery retailer has decided to change its current approach to shelf-space decisions and in-store replenishment planning.

Read the full article