Managing Freshly Baked Bread - Statistical Analyses of Demand Patterns; Suggestions for Improvement of Control Principles

Abstract

In the recent years, retailers have increased their product range in all categories due to more heterogeneous customer preferences, customers seeking for greater varieties and competition with other retailers. Broader assortments increase the uncertainty in the demand for the individual products and the consequences of over and understocking are severe. But as the number of varieties increased, the differentiation between products decreased and the products became more substitutable. The demand for a sold out product can be satisfied by a similar product in stock, reducing the risk of bad ordering. The factors influencing substitution and the influence of substitution in assortment planning problems have been widely discussed in the literature. However, optimization models are based on parameter estimations that require numerous quantities of data. This paper is aimed to provide the retailers of bakery bread with a guidance on how to measure and apply the effect of product substitution in their assortment planning and inventory management decisions to maximize the customer satisfaction with a minimum waste production. The research was conducted in cooperation with the leading Norwegian retail chain in the low cost segment. Results for the particular case and suggestions for improvement are discussed, although most of the methodology and applications can be extended to other retailing environments.