Excess shelf space in retail stores : an analytical model and empirical assessment

Marketing and operations responsibilities meet in retail stores on the shelves. The shelf is the location where any product meets the consumer, whereas the shelf is also the final inventory location in the retail supply chain. Marketing assumes that the presence of inventory drives demand and therefore requires excellent operations. In operations, the main concern is with the trade-off between inventory holding cost on the shelf and the cost of replenishment. We gathered empirical data at a grocery retail chain and were able to combine marketing and operations data into a single database. This provided us the opportunity to conduct a unique analysis. We could compare the results of the space allocation decisions of the marketers with a basic analytic model that incorporates aspects of marketing and operations. Based on this comparison, we argue that significant amounts of excess shelf space exist for a large part of the assortment of a retailer. Excess shelf space is retail space that is not required to carry out the current operations with respect to customer service and costs. We also observed that the cost of replenishment is non-linear and dominates the inventory holding cost. Therefore, excess shelf space cannot easily be eliminated. Instead, excess shelf space in the presence of a non-linear cost of replenishment offers enormous opportunities for the development of new supply chain coordination mechanisms.