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Fall 2012 Seminar Series

MASSACHUSETTS INSTITUTE OF TECHNOLOGY
OPERATIONS RESEARCH CENTER
FALL 2012 SEMINAR SERIES

DATE: October 18th
LOCATION: E51-376
TIME: 4:15pm
Reception immediately following

SPEAKER:
Marshall Fisher

TITLE
Retail Assortment Optimization

ABSTRACT
A retailer’s assortment is the set of products they carry in each store at each point in time. Obviously the assortment a retailer chooses to carry has an enormous impact on their revenue, profitability and customer satisfaction. I describe joint work with Ramnath Vaidyanathan, a PhD student in Operations and Information Management at Wharton, now in the business school at McGill. We consider the problem of choosing, from a set of N potential SKUs in a retail category, K SKUs to be carried at each store of a retail chain so as to maximize revenue or profit. Assortments can vary by store, subject to a maximum number of different assortments. We describe an approach in which we view a SKU as a set of attribute values, use sales history of the SKUs currently carried by the retailer to estimate the demand for attribute values and from this, the demand for any potential SKU, including those not currently carried by the retailer. We also introduce a model of substitution behavior, estimate the parameters of this model and consider the impact of substitution in choosing assortments. We use maximum likelihood estimation to fit the parameters of our model and describe several alternative heuristics for choosing SKUs. We describe application of this approach to optimize assortments for three real examples, snack foods, tires, and appearance chemicals. The tire and appearance chemicals recommendations were implemented and produced revenue increases of 5.8% and 3.5% respectively, increases which are significant relative to typical comparable store increases in these segments.


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