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Scheduling Promotion Vehicles to Boost Profits

44 Pages Posted: 2 Aug 2015 Last revised: 2 May 2017

Lennart Baardman

Massachusetts Institute of Technology (MIT) - Operations Research Center

Maxime C. Cohen

New York University (NYU) - Leonard N. Stern School of Business

Kiran Panchamgam

Oracle Retail Science

Georgia Perakis

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Danny Segev

University of Haifa - Department of Statistics

Date Written: July 31, 2015

Abstract

In addition to setting price discounts, retailers need to decide how to schedule promotion vehicles, such as flyers and TV commercials. Unlike the promotion pricing problem that received great attention from both academics and practitioners, the promotion vehicle scheduling problem was largely overlooked, and our goal is to study this problem both theoretically and in practice. We model the problem of scheduling promotion vehicles to maximize profits as a non-linear bipartite matching-type problem, where promotion vehicles should be assigned to time periods, subject to capacity constraints. Our modeling approach is motivated and calibrated using actual data in collaboration with Oracle Retail, leading us to introduce and study a class of models for which the boost effects of promotion vehicles on demand are multiplicative.

From a technical perspective, we prove that the general setting considered is computationally intractable. Nevertheless, we develop approximation algorithms and propose a compact integer programming formulation. In particular, we show how to obtain a ($1-\epsilon$)-approximation using an integer program of polynomial size, and investigate the performance of a greedy procedure, both analytically and computationally. We also discuss an extension that includes cross-term effects to capture the cannibalization aspect of using several vehicles simultaneously. From a practical perspective, we test our methods on actual data through a case study, and quantify the impact of our models. Our tests suggest that a rigorous optimization approach to the promotion vehicle scheduling problem allows the retailer to increase its profit by 2% to 9%.

Keywords: Retail Operations, Promotion Optimization, Integer Programming, Approximation Algorithms

Suggested Citation

Baardman, Lennart and Cohen, Maxime C. and Panchamgam, Kiran and Perakis, Georgia and Segev, Danny, Scheduling Promotion Vehicles to Boost Profits (July 31, 2015). Robert H. Smith School Research Paper No. RHS 2638396. Available at SSRN: https://ssrn.com/abstract=2638396 or http://dx.doi.org/10.2139/ssrn.2638396

Lennart Baardman

Massachusetts Institute of Technology (MIT) - Operations Research Center ( email )

77 Massachusetts Avenue
Bldg. E 40-149
Cambridge, MA 02139
United States

Maxime Cohen

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY NY 10012
United States

Kiran Panchamgam

Oracle Retail Science ( email )

Burlington, MA Massachusetts 01803
United States

Georgia Perakis (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Danny Segev

University of Haifa - Department of Statistics ( email )

Haifa 31905
Israel

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