A model to maximize margin and automate reorders in retail: a real case of development in an Italian SME

In the retail sector, one of the main assets is shelf exposing space. However, most of the commercial applications available, as well as the procedures that retailers use to allocate space to products, are far from optimization purposes. Typically, retailers face two crucial decisions in order to attract customers: first, they have to define the assortment -which products to carry in the stores?-, then they have to organize the products’ facings -how many items for the same product to display in the front row?-. The outcome of these choices constitutes the marginality per exposing meter, that is a direct determinant for the profitability of a store. As it is clear then, it is of paramount importance to get this choice right. However, most of the solutions available on the market are far from helping retailers in answering those questions. With respect to the assortment, nothing more than “evolved” market analysis tools exists. On the other hand, relative to the facing, the commercial applications available are limited to the aesthetic organization of products. With respect to the following work, the condition of an Italian retail chain experiencing this contradiction is analyzed and a solution is proposed to solve this issue. The company analyzed is a private outlet chain, characterized by small dimension, multi departments and limited budget. In these terms, the objective was to rationalize the allocation of an asset -that is shelf exposing space-, with the intent to maximize profitability under operational constraints. Also, to keep pace with the strong growth in new openings, the solution implemented had to be scalable and automatic. To do so, we started from analyzing the foundations of the company’s problem. Then, the theoretical framing of the problem has been set through a literature review on the topic and a theoretical model that maximizes the marginality per exposing meter has been formulated. Then, in the absence of a commercial application solving the company’s issues, a proprietary software was developed both in a prototypal and definitive version. In the end, after more than one year that the implemented software is up and running, an impact analysis has been conducted, analyzing the outcomes on the company’s processes, people and customers. Following the development, the company has been able to organize its resources more efficiently, with significant reduction of manual repetitive actions and optimized allocation of stores’ space. This sets a unicum in the portfolio of solutions available in the market, in that there is no commercial application at disposal of retailers that automatically defines the combination in number of items in facing of a product so as to maximize the profitability of a store. Also, the solution is scalable, with minimal costs to retailers relative to expansion in the number of stores and flexible enough to bear with multiple departments with thousands of stock keeping units in them.