Managing a Retailer's Shelf Space, Inventory, and Transportation

• Authors: Gerard Cachon
• Venue: Manufacturing & Service Operations Management
• Year: 2001

Retailers must constantly strive for excellence in operations; extremely narrow profit margins leave little room for waste and inefficiency. This article reports a retailer's challenge to balance transportation, shelf space, and inventory costs. A retailer sells multiple products with stochastic demand. Trucks are dispatched from a warehouse and arrive at a store with a constant lead time. Each truck has a finite capacity and incurs a fixed shipping cost, no matter the number of units shipped. There is a per unit shelf-space cost as well as holding and backorder penalty costs. Three policies are considered for dispatching trucks: a minimum quantity continuous review policy, a full service periodic review policy, and a minimum quantity periodic review policy. The first policy ships a truck when demand since the previous shipment equals a fixed fraction of a truck's capacity, i.e., a minimum truck utilization. The exact analysis of that policy is the same as the analysis of reorder point policies for the multiechelon problem with one-warehouse, multiple retailers, and stochastic demand. That analysis is not computationally prohibitive, but the minimum quantity level can be chosen with a simple economic order quantity (EOQ) heuristic. An extensive numerical study finds the following: Either of the two periodic review policies may have substantially higher costs than the continuous review policy, in particular when the warehouse to store lead time is short; the EOQ heuristic performs quite well; the minimum quantity policy's total cost is relatively insensitive to the chosen transportation utilization, and its total cost is close to a lower bound developed for this problem.