Assortment planning in fashion retailing: methodology, application and analysis

Assortment planning is the process conducted by the retailer to determine the number and types of products in a line. Key questions that arise in this process include choosing the inventory depth and variety breadth, and the mix between basic and fashion merchandise of the assortment to maximize expected profits. We describe a method for resolving these questions. Using demand forecasts derived from historical sales patterns, we use a nonlinear integer programming model to make the assortment choice. Efficient heuristics are developed to solve this problem. We applied our method at a large catalog retailer specializing in women's apparel. We compared our method to the existing rules used by this retailer and found that it could choose the assortment in a manner that reduces markdowns due to excessive inventory and lost margins due to stockouts by enough to increase profits by at least 40%. Insights are developed to better understand why products are included in an assortment and the implications of this choice on the realized profit. We extend our model to include shelf space constraints and the effect of assortment choice on product demand.