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Shelf Space Selection to Control Product Expiration

Product expiration is an important problem in the consumer-packaged-goods industry eroding profits and generating substantial waste. We propose that shelf space selection can be an operational lever to control expiration of perishable inventory. To this end, we first explain the conditions under which shelf space impacts expiration then develop a method to determine the appropriate level of shelf space which incorporates this impact. 
 
We formulate a shelf space selection problem for a single product using an infinite horizon Markov chain model. For the special case where demand is constant across periods, we find closed-form expressions for the average net profit, order levels, and expiration levels as a function of the product’s shelf space under different shelf rotation assumptions. We show that when inventory is not rotated, expiration increases quickly when shelf space exceeds the demand per period. In contrast, when inventory is rotated, the increase occurs when shelf space is larger than the product demand throughout its shelf life. 
 
Since computing the optimum shelf space is computationally-challenging for large shelf life values, we approximate the net profit function leveraging the constant demand analysis. Our approximation method is easy to implement and performs well with a median optimality gap of 0.41% across 160 scenarios. We compare our method with two alternative heuristics and find that it performs well. As a byproduct of this approximation, we develop several managerial insights for the shelf space decision at the tactical level. In addition, we extend our analysis to consider shelf space dependent demand.