A Sensitivity Analysis of Retailer Shelf Management Models by Norm Borin California Polytechnic State University, Paul Farris University of Virginia

A Sensitivity Analysis of Retailer Shelf Management Models

NORM BORIN
California Polytechnic State University

PAUL FARRIS
University of Virginia

A shelf management model was developed to assist retailers with the decision of which products to stock and how much space to allocate to those products. Due to the non-linearities in the formulation a closedfotm solution is not possible. Borin, et al. develop a search heuristic based on simulated annealing and compare the solution against a known optimum. A barrier to the use of such models is the fact that managers typically do not have access to error-free estimates of theparameters requiredfor the model construction (shelf elasticities, search loyalty, and consumer preferences). In this article we analyze the degree of error that may be introduced into estimates of the parameters before the model yields assortments and shelf allocations that are inferior to those produced by the merchandising rule of thumb, share-of-shelf = share-of-sales. The results indicate thatjudgmental estimates ofparameters can vary by as much as 50 percent and still make application of the model useful.

1. INTRODUCTION

With limited shelf space and an abundance of current and new products, retailers must make decisions frequently about which products to stock and how much space to allocate to those products. Many retailers are now turning to shelf management models to help with these decisions. Within the last fifteen years there have been a number of models developed which incorporate some or all of these objectives (Anderson, 1979; Hansen and Heinsbroek, 1979; Corstjens and Doyle, 1981, 1983; Bultez and Naert, 1988; Bultez, Naert, Cijsbrechts and Vanden Abelle, 1989). However, these models suffer from two important problems, which often limit their effectiveness. First, because of non-linearities and complexities, the models must often be simplified before a solution set can be derived, which often reduces the usefulness

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