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Case Study: Optimizing Shelf Space for Better Profitability

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Services and Operations Management: Optimizing Shelf Space for Better Profitability

An interview with Michael Ketzenberg

The Company

A national grocery chain.

The Challenge

The grocery retailer wanted to optimize its shelf space allocation for an entire product category for better profitability. In particular, the oil and shortening product category was not producing sufficient results for the grocery chain as compared to the shelf space provided.

The Solution

Transactional data for the entire category over a period of several years was collected from the client. Based on product demand, cost, supply lead times, product substitutability, and estimates of price elasticities, BRG experts came up with a model to manage inventory for the entire category; the model delivered a specific recommendation for the amount of space that should be allocated for each product, as well as its position (shelf level and location in the store).

The Results

The result for the chain was to maximize sales while minimizing inventory investment. Specifically, the number of linear feet available to sell existing products was reduced to optimal values, leaving the balance available for new products to potentially increase total sales from the category. The model continues to be run on an ongoing basis to test for cannibalization that may occur from the shift from old to new product mix, updating the profit forecast as a result.