Retail Supply Chain Management Early Titles in the INTERNATIONAL SERIES INOPERATIONSRESEARCH& MANAGEMENT SCIENCE

We propose a model for the rationalization of retail assortment andstocking decisions for retail category management. We assume that consumers are heterogeneous in their intrinsic preferences for items and are willing tosubstitute less preferred items to a limited extent if their preferred items arenot available. We propose that the appropriate objective function for a farsighted retailer includes not only short-term profits but also a penalty fordisutility incurred by consumers who do not find their preferred items in theavailable assortment. The retailer problem is formulated as a constrained integer programming problem. We demonstrate an empirical application of our proposed model using household scanner panel data for eight items in thecanned tuna category. Our results indicate that the inclusion of the penalty for disutility in the retailer’s objective function is informative in terms of choosingan assortment to carry. We find that customer disutility can be significantly reduced at the cost of a small reduction in short term profits. We also find that the optimal assortment behaves non-monotonically as the weight on customerdisutility in the retailer’s objective function is increased.