Optimizing the assortment planning of highly differentiated products with demand and location complexity in Europe : A case of the e-commerce cosmetic industry

Abstract: The cosmetic industry is characterized by having the ability to offer a wide range of differentiatedproducts. This leads in turn retailers to make strategic decisions regarding assortment planning. Itmeans choosing the right breadth and depth of products that should be allocated to a distributioncenter. This is essential to the ability to answer the needs of their customers. Besides the range ofproducts retailers also face the choice of the optimal location of the distribution center. Both the rangeof carefully chosen products and agglomeration economies affect efficiency, customer satisfaction aswell as transportation delays and costs. Therefore, in this research, we have developed a framework tooptimize both the ranges of products and agglomeration economies. To do this study, we havecollaborated with LYKO AB, a firm within the cosmetics industry offering highly differentiatedproducts with e-commerce solutions. We frame their problem by creating a three-step optimizationsolution. It is combined with a demand module, optimization module, and localization module. Theresult showed that 36 products within the selected subset had a high demand,10 out of these productsfurther maximized the profit of the firm. The localization module showed that among the fourconsidered countries in Europe (Germany, Netherlands, Poland, and Austria) the optimal geographicallocation to locate the warehouse was Germany. This result was based on logistic decisions such ascustomer population, best distance, and level of competition. In conclusion, to be able to optimize theassortment planning of highly differentiated products to maximize the profit based on localization andcustomer demand complexity one can use a three-step optimization solution.