Substitutable Item Demand Planning With Category-Level Elasticity
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Solution Overview
Problem
Existing demand planning models for retail products are inefficient and impractical due to the quadratic scaling of cross elasticity calculations, leading to unreliable forecasts and inability to account for the interactions of a large number of substitutable items, resulting in incomplete data processing and suboptimal pricing strategies.
Innovation Solution
A demand planning model that calculates cross elasticity for each item and a single category elasticity, reducing the number of calculations to linearly scale with the number of items, allowing for accurate forecasting and optimization of prices based on interdependent demand and pricing relationships without estimating cross elasticities for each pair of items.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Measurement precision
If cross elasticity is calculated for every pair of substitutable items, then demand forecasting accuracy is improved, but computational complexity and processing time increase quadratically
Solution Approach 1:
The patent merges individual item cross elasticity calculations into a single category-level elasticity calculation. Instead of calculating cross elasticity for every pair of substitutable items (which scales quadratically), the invention aggregates items into categories and performs a single elasticity calculation at the category level, thereby maintaining forecasting accuracy while reducing computational complexity to linear scaling.
Solution Approach 2:
The patent segments the product catalog into hierarchical categories (e.g., department, class, family, aisle). This segmentation allows the system to perform elasticity calculations at the category level rather than at the individual item level, reducing the number of calculations required while preserving the substitutable relationships through the hierarchical structure.
2Reliability
If cross elasticity is calculated for every pair of substitutable items, then demand interactions are captured comprehensively, but processing time and computational resources increase
Solution Approach 1:
The patent combines multiple individual cross elasticity calculations into a single category-level calculation. By aggregating substitutable items into categories and performing one elasticity calculation per category rather than one per item pair, the system maintains comprehensive demand interaction coverage while dramatically improving processing efficiency and reducing computational resource requirements.
3Measurement precision
If traditional cross elasticity methods are used for hundreds of items, then detailed product-level analysis is achieved, but scalability and ease of operation deteriorate
Solution Approach 1:
The patent implements hierarchical category segmentation that allows the system to scale from small to large catalogs without increasing operational complexity. By organizing items into categories and performing elasticity calculations at the category level, the system maintains product-level analysis capability while achieving linear scalability, making it easy to operate even with hundreds or thousands of items.
Data Source
AI summary
A system and method are disclosed for planning a product assortment based on a sales forecast without using a cross elasticity by receiving a percentage pricing change for at least two substitutable products of an inventory in a supply chain network having one or more supply chain entities, and at least two substitutable products are grouped in the same product category and at least one of at least two substitutable products is grouped in a product assortment, calculating an average percent pricing change for the product category including at least two substitutable products and a direct effect factor and cross-effect factor for each of at least two substitutable products, and identifying an item of at least two substitutable items to be removed from the product assortment based, at least in part, on a substitutable demand calculated by modeling a price increase of a substitutable item to infinity.