Drivers of Product Expiration in Consumer Packaged Goods Retailing
Management Science, Forthcoming
44 Pages Posted: 28 Dec 2017 Last revised: 29 Dec 2017
Date Written: December 26, 2017
Product expiration is an important problem in the consumer packaged goods (CPG) industry costing 1-2% of gross retail sales and eroding industry profits substantially. It can be caused by several factors related to store operations, supply chain practices, and product demand characteristics. Existing methods used in the industry are inadequate to identify the causes of expiration, leading to inadequate efforts to reduce expiration. Using retail data for 768 SKUs and 10,000 stores (745,638 store-SKU level observations) as well as upstream supply chain data from a CPG manufacturer, we show the extent to which expiration of products in retail stores is driven by case size, inventory aging in the supply chain, minimum order rules, manufacturers' incentive programs for the salesforce, replenishment workload, and many control variables. A counterfactual analysis based on the model shows that our subject manufacturer can reduce expiration by up to $38.82 million per year by implementing four selected initiatives involving case size, supply chain aging, minimum order rules, and sales incentives. Further, targeted initiatives can be designed using combinations of these variables for subsets of products with the highest occurrence of expiration.
Keywords: retail operations, consumer packaged goods, product expiration, food waste, empirical, perishable inventory, supply chain management, marketing/operations interface, sustainable operations management, zero-inflated models
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