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  • A retail store SKU promotions optimization model

    Rights statement: This is the author’s version of a work that was accepted for publication in European Journal of Operational Research. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in European Journal of Operational Research, 260, 2, 2017 DOI: 10.1016/j.ejor.2016.12.032

    Accepted author manuscript, 1.91 MB, PDF document

    Available under license: CC BY-NC-ND: Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License

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A retail store SKU promotions optimization model for category multi-period profit maximization

Research output: Contribution to journalJournal article

Published
<mark>Journal publication date</mark>16/07/2017
<mark>Journal</mark>European Journal of Operational Research
Issue number2
Volume260
Number of pages13
Pages (from-to)680-692
Publication statusPublished
Early online date27/12/16
Original languageEnglish

Abstract

Consumer promotions are an important element of competitive dynamics in retail markets and make a significant difference in the retailer's profits. But no study has so far included all the elements that are required to meet retail business objectives. We extend the existing literatures by considering all the basic requirements for a promotional Decision Support System (DSS): reliance on operational (store-level) data only, the ability to predict sales as a function of prices and the inclusion of other promotional variables affecting the category. The new model delivers an optimizing promotional schedule at Stock-Keeping-Unit (SKU) level which maximizes multi-period category level profit under the constraints of business rules typically applied in practice. We first develop a high dimensional distributed lag demand model which integrates both cross-SKU competitive promotion information and cross-period promotional influences. We estimate the model by proposing a two stage sign constrained regularization approach to ensure realistic promotional parameters. Based on the demand model, we then build a nonlinear integer programming model to maximize the retailer's category profits over a planning horizon under constraints that model important business rules. The output of the model provides optimized prices, display and feature advertising planning together with sales and profit forecasts. Empirical tests over a number of stores and categories using supermarket data suggest that our model generates accurate sales forecasts and increases category profits by approximately 17% and that including cross-item and cross-period effects is also valuable.

Bibliographic note

This is the author’s version of a work that was accepted for publication in European Journal of Operational Research. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in European Journal of Operational Research, 260, 2, 2017 DOI: 10.1016/j.ejor.2016.12.032