Optimal Shelf Space Allocation Using System Dynamics Approach: A Case Study in Shoe Retailing Industry

Abstract

Shelf space is a limited resource in a retailing store and multiple brands compete to get the maximum of this resource for their exposure to customer. However, a retailer's objective usually is to allocate space to each brand in such a way that yields maximum cumulative profit from the shelf space available. A retailer would make space allocation decisions based on various attributes possessed by the brands to be displayed. Such attributes may include: relative demand, price, profit margin, price elasticity, demand-space elasticity, cross-space elasticity, weather and temporal effects on demand of brands, demographic characteristics of visiting customers, and substitution relationships of a brand with competing brands to name a few. Hence an analysis of these variables together to find out an optimal brand space allocation decision that maximizes total profit of the shelf-space is a fairly complex and dynamic problem. This paper explores the use of system dynamics approach for studying shelf space allocation decisions in the context of shoe retailing stores. Based on data which is part collected, part hypothetical (but with reasonable assumptions) a system dynamics model is developed for finding a solution of the aforementioned problem. The objective of the model is to determine optimal shelf space allocation that maximizes net profit of the store at given set of retailing store's constraints. Further implications of the model results are discussed and future research directions are proposed.