Managing Retail Shelf and Backroom Inventories When Demand Depends on the Shelf‐Stock Level

Abstract

Inventory displayed on the retail sales floor not only performs the classical supply function but also plays a role in affecting consumers’ buying behavior and hence the total demand. Empirical evidence from the retail industry shows that for some types of products, higher levels of on‐shelf inventory have a demand‐increasing effect (“billboard effect”) while for some other types of products, higher levels of on‐shelf inventory have a demand‐decreasing effect (“scarcity effect”). This suggests that retailers may use the amount of shelf stock on display as a tool to influence demand and operate a store backroom to hold the inventory of items not displayed on the shelves, introducing the need for efficient management of the backroom and on‐shelf inventories. The purpose of this study is to address such an issue by considering a periodic‐review inventory system in which demand in each period is stochastic and depends on the amount of inventory displayed on the shelf. We first analyze the problem in a finite‐horizon setting and show under a general demand model that the system inventory is optimally replenished by a base‐stock policy and the shelf stock is controlled by two critical points representing the target levels to raise up/drop down the on‐shelf inventory level. In the infinite‐horizon setting, we find that the optimal policies simplify to stationary base‐stock type policies. Under the billboard effect, we further show that the optimal policy is monotone in the system states. Numerical experiments illustrate the value of smart backroom management strategy and show that significant profit gains can be obtained by jointly managing the backroom and on‐shelf inventories.

Maximizing Profit via Assortment and Shelf‐Space Optimization for Two‐Dimensional Shelves

“…, Xue et al. ). Further extensions in this area would address additional operational restrictions in backroom inventory and delivery frequency (cf.…”

“…Another topic of research interest is combination of the tactical problem described in this study with operational topics, such as shelf refilling, order management and inventory accuracy (cf. e.g., Curseu et al 2009, DeHoratius and Raman 2008, DeHoratius and Ton 2015, Donselaar et al 2010, Sharma et al 2019, Xue et al 2017. Further extensions in this area would address additional operational restrictions in backroom inventory and delivery frequency (cf.…”

Exploring the Connections between Backrooms, Inventory Record Inaccuracies, and Waste

“…In the previous section, we explained how backrooms may cause such misplaced SKUs. Xue et al [28] remind us that there is often a difference between the cost of carrying an item (or case) in a backroom storage area and carrying the same item on the sales floor, where it can be a source of revenue simply by being in the sight of customers. Xue et al [28] note that there are "potentially considerable" cost implications of these differences.…”

“…Xue et al [28] remind us that there is often a difference between the cost of carrying an item (or case) in a backroom storage area and carrying the same item on the sales floor, where it can be a source of revenue simply by being in the sight of customers. Xue et al [28] note that there are "potentially considerable" cost implications of these differences. In 2017, Walmart, realizing the impact of housing extra units on the sales floor, developed their "Top Stock" testing program in several stores, moving backroom inventory to the top shelf of their sales floor [7].…”

An Overview on Omnichannel Inventory Strategy under Uncertain Demand

“…Omnichannel involves two or more channels, so channel supply is also one of the key points in inventory management. Xue et al (2017) studied how to adjust the inventory of products in display racks and warehouses according to product attributes and designed the optimal inventory strategy. Acimovic and Graves (2015) studied the optimal replenishment allocation to fulfillment centers to reduce transportation costs and mitigate costly spillover effects.…”