Clustering retail stores for inventory transshipment

Emily C. Griffin, Burcu B. Keskin and Arthur W. Allaway

European Journal of Operational Research, 2023, vol. 311, issue 2, 690-707

Abstract: Rapid growth in the world of e-commerce is forcing traditional retailers to rethink their operational efficiency and revenue/cost streams. Retailers are facing increasing pressure to better utilize in-store inventory and reduce end-of-season markdowns. Transshipments between stores can re-balance inventory levels while preventing shortages and backorders. However, the joint inventory and transshipment problem is difficult to optimize in an extensive network, and many retailers lack the capital and managerial bandwidth required to create a system capable of transshipments between any two stores in a network of hundreds. We consider two multi-location newsvendor problems with reactive and proactive transshipments, respectively. We propose clustering stores into transshipment groups while considering both demand correlation and physical distance between locations. Since minimizing demand correlation does not follow the triangle inequality, we introduce two modified clustering algorithms that outperform existing algorithms for distance- and correlation-based clustering. For a given set of clusters, we mathematically model these two problems considering total system profit. In addition, we quantify the performance of distance-based and correlation-based clustering under several inventory ordering and transshipment policies to show the robustness of our results. To verify our methods, we test the proposed methodology using grocery sales data from IRi over three years in Houston and Dallas, TX and liquor licensee purchase information over three years from the Iowa state government. We present correlation, transshipment, and profitability analysis. We show that when demand correlation is present and stable over time, clustering based on demand correlation can maintain high transshipments and profits while decreasing solution complexity.

Keywords: Analytics; Clustering; Transshipments; Newsvendor; Simulation (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0377221723004599
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:311:y:2023:i:2:p:690-707

DOI: 10.1016/j.ejor.2023.06.008

Access Statistics for this article

European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati

More articles in European Journal of Operational Research from Elsevier
Bibliographic data for series maintained by Catherine Liu ().