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Using the Pack‐and‐a‐Half Rule to Eliminate Backroom Inventories in Retail Operations
Author(s) -
Eroglu Cuneyt,
Williams Brent D.,
Waller Matthew A.
Publication year - 2018
Publication title -
journal of business logistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.611
H-Index - 79
eISSN - 2158-1592
pISSN - 0735-3766
DOI - 10.1111/jbl.12191
Subject(s) - business , product (mathematics) , popularity , industrial organization , operations research , mathematics , psychology , social psychology , geometry
In the retail industry, backroom inventories are typically associated with higher labor costs and greater operational complexity. Thus, retailers look for ways to eliminate backroom inventories. A heuristic used for this purpose is the pack‐and‐a‐half rule which suggests that the shelf space allocated for a product should be at least 50% larger than the case pack quantity in which the product is delivered. Despite its popularity among retailers, the pack‐and‐a‐half rule has been ignored in the academic literature. We introduce the pack‐and‐a‐half rule, assess its impact on a retailer's profits, identify cost, demand, and product characteristics driving this impact, and propose a modification. Based on an analysis of data obtained from a retailer on 1,986 SKU s in 20 categories, we find that the pack‐and‐a‐half rule decreases a retailer's profits, on average, by 10% when applied uniformly across all SKU s. Further, this decrease is significantly affected by product depth, product width, demand elasticity, case pack quantity, and inventory carrying cost. Finally, we develop a set of modifications based on these variables where the pack‐and‐a‐half rule is applied selectively and in a stepwise fashion. These modifications limit the decrease in a retailer's profits to a range between 6% and 7%.