Logistics and assortment depth in the retail supply chain: Evidence from grocery categories

Journal of Business Logistics, 2002 by Stassen, Robert E, Waller, Matthew A

Effective logistics requires managing tradeoffs between various costs subject to achieving target customer service levels (Ballou 1998; Bowersox and Closs 1996; Coyle, Bardi, and Langley 1996; Lambert, Stock, and Ellram 1997; Wood et al. 1999). Specifically, retailers and their suppliers face many different cost tradeoffs and issues when making assortment decisions. In spite of this, research on the logistics of assortment in the retail supply chain is sparse. This is surprising given that research on grocery retailers has found that as many as 39% of consumers do not find at least one item they are looking for in a typical shopping trip (Emmelhainz, Emmelhainz, and Stock 1991). Since supermarket sales are about $351 billion per year in the United States, the magnitude of this situation is large (Economic Census 1997). When coupled with the fact that the average consumer shops three or four different grocery stores per week, it is easy to see that retailers who manage the logistics issues resulting from their assortment well have an opportunity to take share from their competitors and increase their sales (Woolf 1994).

Simply increasing assortment to increase returns on investment is particularly difficult in the grocery industry since the margin percentages are low and there are billions of dollars of excess inventory (Kurt Salmon Associates, Inc. 1993). Increasing assortment depth normally implies an additional investment in inventory, subsequently leading to an excess inventory on some items and, within a fixed amount of display space, an increasing incidence of stockouts on others. This, in combination with the frequent introduction of new branded items and the growth of private label products (Norek 1997), means that managing the logistics of retail assortment is difficult.

Morash, Droge, and Vickery (1996) classified logistics capabilities as either supply chainoriented or demand chain-oriented. Within that framework, the capability of managing the logistics of retail assortment would be classified as demand chain-oriented. Of the logistics capabilities they analyzed in their empirical study, demand chain-oriented logistics capabilities had the greatest impact on firm profitability. Managing the tradeoffs between inventory and assortment within a constrained space, taking into account the effects of sales, is a logistics capability that is needed in the retail supply chain.

Assortment and depth of merchandise are terms commonly used for characterizing the number of stock-keeping units (SKUs) carried by a retailer in a category of substitute items (Levy and Weitz 2001). Assortment depth (or selection) influences consumer store choice; significant inventory investment and subsequent allocation of display area by retailers are needed to accommodate these preferences (Kahn and McAlister 1997). For example, a shopper in a conventional supermarket might like to select from among 56 SKUs of tomato spaghetti sauce; however the costs and complexities of maintaining such depth would make it unprofitable for retailers. Clearly, such depth raises questions concerning: (1) the existence of extreme differentiation in market preferences; (2) the incremental gains in the category's sales realized from going, for example, from 55 to 56 SKUs; (3) the effects on inventory investment; and (4) the impact on customer service levels.

The purpose of this paper is to provide an analysis of logistics factors affecting retailer profitability resulting from the depth of SKUs stocked from a given supplier. First, the paper presents the deductive analysis of the logistics resulting from changes in assortment depth. Second, variables from a case study of a grocery chain are analyzed across categories with respect to the deductive analysis to illustrate a typical position faced by grocery stores. Third, the retailer-supplier relationship governing depth is examined in an analysis of 30 brands across 27 stores. The final discussion brings together all of the analyses and results of this research.

THE LOGISTICS OF ASSORTMENT DEPTH

The following analysis is presented as a simplified framework to describe the effect of assortment depth on gross margin and logistics costs, determining retailer profitability. The analysis seeks to examine a retailer under competitive conditions, managing depth from a supplier whose brands) has a low degree of substitution, and therefore, lower levels of competition among suppliers. Additionally, the analysis presumes that the retailer allocates a fixed proportion of retail display space to a category. Subsequent to this, a decision is made concerning the number of SKUs stocked.

It is assumed that increasing the depth within a brand will increase the magnitude of gross margin within that category in two ways. First, increasing depth can bring in additional sales from consumers familiar with the variety within the market. Forexample, if a store carries only one of a supplier's SKUs, there will be shoppers who prefer other SKUs (different sizes or flavors of a brand) found in the market and make purchases when they are in a competitor's store. Thus, stores carrying deeper assortments have a higher probability of satisfying a broader range of consumers and have increasing gross margins (through increased sales). Second, adding unique items, not found at competitors, can provide opportunities for higher margins due to the lack of price competition on that item. These unique items may also increase gross margins by initiating trial purchases on new SKUs, or may bring in new consumers to the category.