Drivers of Product Expiration in Consumer Packaged Goods Retailing

Abstract

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 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 sales force, 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.