Shelf and Inventory Management with Space-Elastic Demand

Managing limited shelf space is a core decision in retail as increasing product variety is in conflict with limited shelf space and operational replenishment costs. In addition to their classical supply function, shelf inventories have a demand generating function, as more facings lead to growing consumer demand. An efficient decision support model therefore needs to reflect space-elastic demand and logistical components of shelf replenishment. However shelf space management models have up to now assumed that replenishment systems are efficient and that replenishment costs are not decision relevant. But shelf space and inventory management are interdependent, e.g., low space allocation requires frequent restocking. We analyzed a multi-product shelf space and inventory management problem that integrates facing-dependent inventory holding and replenishment costs. Our numerical examples illustrate the benefits of an integrated decision model.