Pre Pack Optimization

Increasing Supply Chain Efficiency

Inderlal Singh Chettri

Divyanshu Sharma

Retail Business Practice

Cognizant Technology Solutions

500 Glenpointe Center West Teaneck, NJ 07666

Visit us at www.cognizant.com

Pre Pack Optimization White Paper

Executive Summary
Pre packing refers to packing of individual Stock Keeping Units (SKUs) of merchandise into bigger cases for
easier handling in the supply chain. The pre packs consist of varying quantities of different SKUs clubbed
together to form the lowest level of packaging hierarchy and are designed to flow through from the vendor
to the retail stores. Handling of these larger pre packs rather than individual SKUs proves to be cheaper
and faster at all touch points in the vendor to retail store supply chain.
Although pre packing has proven benefits in terms of easier and cheaper handling, the development of pre
pack configurations determining different pre pack compositions is a major challenge. Clubbing together of
individual SKUs into larger cases reduces flexibility of the supply chain. If pre packs need to be opened at
any point before they reach stores, additional cost and time is incurred. Inefficient decision making
regarding pre pack configuration may result in extensive opening up of pre packs and reconfiguration at
distribution centers. It may also lead to excess inventory at stores in case whole pre packs containing
superfluous SKUs are shipped to the stores. This can potentially negate the efficiency enhancement
targeted to be achieved as a result of pre packing.
An efficient pre pack decision-making process involves taking multiple decisions throughout the supply
chain management cycle, starting right from the demand forecast to initial planned allocation during
assortment planning, purchase order generation, as well as allocation performed at the distribution centers.
These decisions have to be taken under various degrees of uncertainty regarding the exact SKU Quantity
demand foreseen at the stores. Demand forecasts are typically probabilistic, based upon which assortment
planning is done and purchase orders are generated. At the time of stocks reaching distribution centers,
store demand is much more concrete in nature, with reduced variability. The pre pack decisions taken at
different points in the supply chain have to accommodate the probabilistic demand forecast and be robust
enough to handle variations in the actual allocation to stores from the distribution centers with respect to
planned allocation at the time of assortment plan development. The ultimate objective is to maximize flowthrough in pre pack terms and minimize handling of individual units throughout the supply chain. This
involves managing various trade-offs at each point with the objective of enhancing overall supply chain
efficiency and reducing the total supply chain costs.
We have developed an approach to pre pack optimization that balances the trade-offs at different points in
the supply chain using data intensive models. This approach has its roots in various standard operations
research problems and their mathematical modeling techniques. It is a modularized approach that focuses
on taking the right decisions at the right time in order to arrive at the best solutions that attain targeted
objectives.
With this approach and with a robust demand forecast, there is scope for a significant improvement in the
efficiency of the supply chain using pre packs that are packaged at the vendor shipment point and that flow
through the supply chain with minimal handling, straight to the retail outlet servicing store demands.

Pre Pack Optimization White Paper

Table of Contents
1 INTRODUCTION TO THE PRE PACKING PROCESS
1.1
1.2

PRE PACKING TOUCH POINTS IN THE SUPPLY CHAIN

PRE PACKING DECISION LAYERS OF UNCERTAINTY

4
5

2 FOUNDATIONS OF THE OPTIMIZATION APPROACH

2.1
2.2
2.3

PRE PACK DEFINED

WHERE DO YOU MAKE THE PRE PACK CONFIGURATION?
COMPARATIVE ANALYSIS OF THE TWO APPROACHES

3 PRE PACK OPTIMIZATION SOLUTION

3.1
3.2

PRE SEASON ACTIVITIES

IN SEASON STEPS

6
7
8
9
10
13

4 CONCLUDING REMARKS

16

5 APPENDIX: MATHEMATICAL MODELING

17

5.1
5.2
5.3
5.4

PRE PACK TEMPLATE DEFINITION

ASSORTMENT OPTIMIZATION
ORDER CONFIGURATION INTO PRE PACKS
OPTIMIZING ALLOCATION TO STORES

17
18
20
22

6 REFERENCES

24

7 ABOUT THE AUTHORS

25

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1 Introduction to the Pre Packing Process
Merchandise is commonly pre packed (or case packed) for easier handling in the supply chain. Pre pack
implies a lumping of the assortment into lots of SKU combinations. These lots are then used as the lowest
level of packaging hierarchy in the supply chain planning and execution cycle.
In apparel and general merchandise retail, a pre pack could contain similar items differentiated by just one
aspect, such as size. For instance, a pre pack of shoes could have shoes of the same style and color but
different sizes packed in one case. This practice is primarily due to the large variety of SKUs in each style
and the low demand for individual SKUs.
The advantage of this practice is that there is less data in the pipeline, which leads to lesser handling in the
supply chain, which in turn increases flow through efficiency. On the other hand, sending a pre pack to a
store could meet the store requirements for some items, while over fulfilling or under fulfilling demand for
other items in the pre pack. This leads to a trade-off between flow through efficiency and demand
inefficiency in the supply chain. Some retailers compromise on this by repackaging pre packs in their
distribution centers or by inter-store transfers.
In a scenario where potentially each SKU can have its own demand pattern, the key challenge in pre
packing is to group the SKUs so that replenishment for each of them is executed efficiently. This is what
pre pack optimization attempts to address.

1.1

Pre Packing Touch Points in the Supply Chain

Pre pack sizes are normally decided by the retailer after considering vendor constraints, if any. This
decision on the retailers side is driven by the SKUs sales history and demand patterns. Demand patterns
depend on the sophistication of the data capture/forecasting/planning process followed by the retailer
leading to variations in the granularity and accuracy of the forecasted data. Some forecasting engines
predict weekly sales by store for a category, while others provide daily sales by SKU and store. The
consolidated demand
pattern
Figure 1 Pre Pack Touch Points in the Supply Chain
drives the planning and ordering
of the assortment that needs to
be supplied to an individual store.
Pre pack sizes are normally
decided when a new vendor
comes on board or when a new
SKU is launched by an existing
vendor. It is our opinion that
retailers need to give more
thought
to
the
pre
pack
configuration at this stage in
order to minimize inefficiencies in
the downstream supply chain. At

Pre Pack Optimization White Paper

this stage, the overall Store-SKU Demand can be configured into pre pack configurations so that ordering of
individual SKU units is minimized. If its a new SKU, the best fit demand pattern (same SKU, similar SKU,
category level forecasts) can be used for this purpose.
The second major touch point in the supply chain relevant to pre packing is at the time of store allocation.
Once the pre packs are received from the vendor at the warehouses, they have to be allocated to stores
based on the actual store demand for SKUs. In a scenario where store demand cannot be fulfilled in terms
of pre packs, there are two choices: to open pre packs and ship individual SKU units or to ship pre packs
and allow for overstocking of certain SKUs at stores. Both these have cost implications and the pre packing
exercise at this point can be focused on minimizing the overall cost.

1.2

Pre Packing Decision Layers of Uncertainty

Over the supply chain, the two major points impacted by pre packing are:
1. Configuring the purchase orders into pre packs so that most of the orders are placed in terms of pre
packs and ordering of individual SKU units is minimized. This is done on the basis of forecasted
demand months before the SKU reaches the store.
2. Allocating to stores in terms of pre packs so that most of the allocation is in terms of pre packs and
opening of pre packs/overstocking due to extra SKUs sent is minimized. This is done on the basis of
forecasted demand a couple of days before the stock reaches the store.
In an ideal scenario where forecasted demand is the same as actual demand, the pre packing exercise boils
down to finding the best fit configurations that minimize ordering in individual units and opening of pre
packs. In reality, this is not the case. Actual demand can vary a lot from forecasted demand. This is mainly
due to the time difference between ordering and sales. Ordering to vendors may precede store allocations
and sales by months, especially if the sourcing is global. Events, unaccounted for by the forecasting model,
could occur which could affect the accuracy of the forecast.
Forecasting accuracy increases as we come closer to the event. So, to link the two areas impacted by pre
packing, we need to consider demand as probabilistic. Creating pre pack configurations in a probabilistic
demand scenario involves greater complexity in modeling the business scenario for optimization.
Success or failure of the pre pack optimization process, in terms of whether pre packs have to be opened
or not, depends on a lot of decision elements in the supply chain, such as:
a) Demand Forecasting the forecasting accuracy determines up to what degree the actual demand
would vary from the expected demand. With high forecast error, pre packs would have to be opened to
fulfill store orders even with accurate initial pre packing.
b) Assortment Planning the assortment planning determines what quantity of each SKU is planned to
be stocked at different stores. In a scenario where the actual store allocation demand varies greatly
from the planned assortment, opening of pre packs would become unavoidable.

Pre Pack Optimization White Paper

Faced with the above preconditions, the pre packing decision has to consider a probabilistic demand and
assortment scenario in most cases. The real challenge then is not just to configure pre packs that are best
fits between assortment and store demands, but also to work on a probabilistic assortment and create pre
pack configurations that can withstand variations in demand at the time of actual allocation. The pre pack
optimization exercise thus needs to model the probabilistic demand and assortment scenario and generate
the pre pack configurations. The questions an efficient pre pack optimization framework would answer are:
1. At what point in the supply chain should the decision to configure pre packs be taken?
2. What should be the permissible limits of variation, weight, dimension and value while configuring a pre
pack definition?
3. How many pre pack definitions should be used?
4. What should be the composition of each individual pre pack in terms of SKUs it holds and quantities of
each SKU?
5. How much of the overall assortment should be configured in terms of pre packs and what percentage
should be handled in individual SKU terms?
There can be multiple points in the supply chain where individual SKUs demanded can be grouped to form
pre packs. It is important to take the right decisions at the right time. The objective is to come up with an
optimal number of pre pack configurations and determine the composition of each one. Too large a number
of configurations may lead to complications in the supply chain and too less a number may lead to a
greater probability of opening of pre packs. A decision has to be made about whether to pack everything in
pre packs or handle some individual units as well. The approach towards building the pre pack optimization
solution would involve exploring all these questions in greater detail and finding the right answers.

2 Foundations of the Optimization Approach

Understanding the basic questions involved leads to comprehension of objectives the solution should attain,
as well as the challenges and risks involved. With this foundation, a first principles-based approach can lead
to the development of a pre pack optimization model that helps maximize efficiency enhancements and
minimize overall supply chain costs.

2.1

Pre Pack Defined

A pre pack can be defined as a combination of different SKUs and quantities of each SKU contained within
a case of a particular weight/dimension.
Figure 2 Pre Pack Definition
PP-A
QTTY

SKU 1
a

SKU 2
b

SKU 3
c

SKU 4
d

SKU 5
e

In the example, PP-A is a Pre Pack Definition that has SKU 1, 2, 3, 4 and 5 in quantities a, b, c, d and e
respectively.

An SKU is defined as a style/color/size combination. Theoretically, a pre pack can have SKU
combinations of multiple styles/multiple colors/multiple sizes. However, in practice, pre packs have

Pre Pack Optimization White Paper

SKU combinations of a single style, and many times, even a single color with just different quantities of
different sizes.

A pre pack can be as large as possible, within the given constraints of dimensions, weight, total value
(in price terms), and so on. These constraints are defined on the basis of various factors, such as the
maximum weight that can be handled and the maximum value of goods the vendor or retailer is willing
to put in a pre pack.

2.2

Where do you make the Pre Pack Configuration?

Based on the understanding of pre pack touch points in the supply chain, there can be two approaches to
configure pre packs. The first one defines pre packs at the purchase order level and the second one defines
pre packs at the store ordering level. In line with the pre pack configuration information flow in the supply
chain, these approaches can be categorized as being top down and bottom up approaches.
2.2.1

The Top Down Approach to Pre Pack Configuration

The assortment plan provides planned allocation of SKUs for each store for each period (usually a week). In
modeling terms, the assortment plan output for each period (normally a week) can be denoted in terms of
the matrix shown in figure 3.
Figure 3 Assortment Plan Matrix
This assortment plan drives purchase order generation
that results in the flow of SKUs from the top (vendor)
down to the store. Pre pack configuration in this case is
done on the basis of top down planned allocation for each
store and hence is seen as the top down approach. At the
time of generation of purchase orders, the assortment
plan is configured in terms of pre packs and orders are
placed in terms of quantities of each pre pack definition rather than each individual SKU.
Figure 4 Pre Pack Decision at Ordering Level

Creating
larger
pre
pack
configurations and having greater
quantities and higher number of SKUs
ensures greater cost advantages in
terms of handling. But larger pre
packs
reduce
flexibility
in
redistribution at the Distribution
Centre
(DC)
and
consequently
increase probability of opening or
overstocking. Thus, it is necessary to
balance divergent goals to ensure that
the pre packs created go straight to
stores without opening. In the top down approach, even though configuration is done at an aggregate
planned allocation level, individual store allocation needs to be considered.

Pre Pack Optimization White Paper

2.2.2

The Bottom Up Approach to Pre Pack Configuration

In another approach that initiates at the individual store allocation level, each store places its demand in
terms of configured pre pack definitions
Figure 5 Pre Pack Decision at Store Level
rather than SKU quantity terms. In this
approach, actual bottom up store orders
are configured into pre packs and sent
to the ordering level. Hence, this is
seen as the bottom up approach to pre
pack configuration.
Each store decides on its own pre pack
configurations within the overall preset
constraints of weight, dimension or
value. The store orders are then placed in terms of defined pre packs and some individual units remaining.
At the ordering level, orders are received from each store in terms of store level pre pack configurations as
well as individual SKU orders. These are aggregated and purchase orders are generated accordingly.
The stocks received from suppliers at distribution centers in this approach are in terms of store level pre
pack configurations. Thus the probability of opening of pre packs is minimized to a large extent, unless
allocation needs to be drastically different from initial store level demand.

2.3

Comparative Analysis of the Two Approaches

The top down and bottom up approaches address the same questions in different ways. While the top
down approach handles the question of pre pack configuration on the basis of planned allocation, the
bottom up approach points to the actual store demand. These occur at different times in the supply chain
management cycle and are pieces of a larger picture. In terms of the rationale for taking the pre packing
decision at the procurement/ordering level or at the store level, both approaches have their pros and cons.
The decision to configure pre packs at the store level increases the probability of a pre pack passing
through to the store because it has been specifically designed for fulfilling a particular store demand. But
on the other hand, designing store specific pre packs reduces the flexibility of distribution. Having different
pre pack definitions for each store may mean a huge, almost unmanageable number of configurations at
the aggregate level. Plus, these pre packs may not be suitable for allocation to any other store in case the
store allocation requirement changes. This may also lead to a greater percentage of the overall assortment
being ordered in individual units.
The top down approach to pre pack configuration resolves some of these issues and creates pre packs
based on aggregate demand rather than individual store demand. This may ensure a manageable number
of pre packs and lesser individual SKUs in the ordering stage. It may also create more flexibility in
allocating pre packs to stores. But the major concern at this stage is the increased probability of pre pack
opening at warehouses.

Pre Pack Optimization White Paper

The rationale behind pre pack configuration is to reduce the SCM costs and increase efficiencies, and it has
been observed that handling individual SKUs has an adverse impact on both. The underlying objective
behind defining pre pack configurations is to minimize handling of individual units throughout the supply
chain. This includes minimizing the individual ordering and breaking of pre packs at any stage in the supply
chain to ship individual SKUs.
Any optimization that concentrates only on a part of the supply chain rather than the whole supply chain
would create disturbances elsewhere. Efficient optimization can happen only when the whole process is
observed in its totality. With this in mind, a pre pack configuration process needs to be developed, that
combines the best inputs of both approaches and provides a larger picture, integrating all the small pieces.

3 Pre Pack Optimization Solution

As discussed, pre pack touch points in the supply chain are distributed across the supply chain and occur at
different times. These touch points involve decisions taken under varying degrees of uncertainty of
demand. The pre pack optimization solution should make it possible to take the right decisions at the right
time in the supply chain, with the purpose of enhancing overall efficiency. The suggested approach involves
breaking down the overall problem into components and executing them at various touch points in
accordance with the inputs and constraints applicable. Steps have to be taken at various levels to ensure
the efficient flow through of pre pack configurations in the supply chain.

Figure 6 Solution Approach for Pre Pack Optimization

Pre Pack Optimization White Paper

The supply chain objective, in a non-pre pack scenario, is to service the store demand on time and at the
lowest cost, based on the desired service levels to be achieved at each store. Store demand is serviced by
the flow of the assortment SKUs through the supply chain. The aim of pre pack optimization is to service
store demand, as far as possible, using pre packs. Thus, the spectrum of the solution building approach
ranges from decisions taken regarding service levels for stores, to decisions involving demand forecasting
and assortment optimization, order configuration, as well as allocation optimization. All these processes are
re-considered and configured with a view towards introducing pre pack configurations and using pre packs
rather than individual SKUs as the lowest unit of the packaging hierarchy. There are steps that happen prior
to the start of the season and span across more than a single season. These are the planning elements as
well as broad levels of agreement that need to be set up between the retailers and suppliers, as well as
broad parameters of demand fulfillment, such as service levels. Some steps need to be taken during the
seasonal cycle. Using a step-by-step approach to taking decisions, this approach achieves the larger
objective integrating the smaller pieces. The steps are classified into two major segments of Pre Season
and In Season Activities.

3.1

Pre Season Activities

3.1.1

Defining Service Levels the Fundamental Step

The process of servicing store demand starts from defining the service levels the level and the degree up
to which store demand would be fulfilled through the supply chain. Service levels are defined based on the
balancing act between the cost of overstocking and the cost of shortage. While excess inventory has its
own adverse impact on ROI, stock outs mean lost sales and may also translate to loss of brand and store
image. A balanced service level attains the right Fill Rate (demand met/expected demand) and increases
the probability of no stock out, keeping in view the criticality of the SKU to the store image, as well as the
speed at which it moves off the shelf. In an ideal scenario, there should be a distinct service level set for
each Store-SKU combination. But in practice, service levels for stores are generally defined for Store-SKU
group combinations, or even more broadly, at the store level.
3.1.1.1 The Service Level Classification Matrix
At the store level, SKUs can be classified
based on the speed of their movement off
the shelf as well as the criticality of their
demand. Once SKUs are classified into
each segment of this matrix, service levels
can be set for each segment. These
service levels and the classification matrix
affect the pre pack optimization process
at every subsequent step. Collectively,
these service levels can be represented by
a service set for each store. This service
level set would have a number of service
levels for each SKU segment for the store.
With pre packing, pre packs rather than

Figure 7 Service Level Classification Matrix

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SKUs are the lowest level of packaging hierarchy. At this stage, the pre pack decision element is to define
rules so that SKUs with similar or complementary demand patterns are packed together. Decisions involve
whether or not to configure fast-moving SKUs with slow-moving SKUs or critical SKUs with non-critical
SKUs, and so on. These decisions and the rules formulated would provide ways to slice this matrix and
prepare segment groupings as an input to pre pack configuration. This would ensure that consistency is
maintained in the pre packed supply chain from the service level point of view.
Furthermore, this matrix provides pointers to understand the criticality of the whole pre packing process
itself. For example, while taking a decision regarding allocating a fast moving critical SKU, there can be
some degree of excess inventory maintained. Similarly, while allocating slow moving non-critical SKUs,
some stock outs may be tolerated. Ultimately, this matrix-based classification provides the fundamental
strategic input on each SKU that governs pre pack decisions taken throughout the supply chain.
3.1.2

Pre Pack Template Definition

The pre pack configuration exercise can be broken into two parts: determining different sizes for pre packs
and determining the composition of each pre pack definition. Both steps are taken in a retailer-supplier
collaborative environment, where mutually agreed fundamental pre pack properties, such as weight and
dimension of the carton, and regulations on pre pack composition are set. In most cases, it is important to
set the carton sizes (weight and permissible number of SKUs) before determining the composition. In this
context, a template is defined as the capacity of a carton that is used to pack in individual units (SKUs) of
mutually agreed style/color/size variations.
The Optimization Model for Pre Pack Template Definition involves:
Figure 8 Pre Pack Template Definition

Based on past data on store demands as well as flow through of individual units into the supply chain,
clubbing together, or lot-sizing of SKUs in different quantity groups can be arrived at, resulting in an
optimal number of cartons and optimal carton capacities. This lot-sizing needs to fulfill the boundary
conditions of maximum permissible weight of a lot packed in a carton and the dimension constraints.
3.1.3

Assortment Plan Optimization

Assortment plans determine the width and depth of the assortment to be carried catering to the cross
section of consumer demand. They also determine planned allocation of SKUs to stores. Assortment plans
are normally based on probabilistic demand scenarios and in cases where actual allocation is widely

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different from the assortment plan, opening pre packs becomes unavoidable. The assortment plan is such a
critical input for pre pack optimization that it becomes almost inevitable to optimize the assortment as a
step towards developing the pre pack optimization solution in cases where the assortment plan input has
not been optimized beforehand. In the pre pack optimization process, the decisions on depth and breadth
of the assortment are generally not considered and the planned allocation is optimized.
Demand forecasts are usually
made for groups of SKUs
Figure 9 Assortment Optimization
projected to be sold in certain
quantities through a group of
stores. A typical demand
forecast would predict that
X number of shoes of a
particular style would be sold
in the 20 stores that sell these
shoes in a certain city.
Assortment
optimization
involves taking the overall SKU groupStore group level demand forecast and disaggregating this to an
SKU-Store based periodic plan. The overall demand is broken up using past demand patterns of individual
SKUs at each store. Optimization is constrained by overall demand forecast figures and the fulfillment of
service levels at each store. In a probabilistic demand scenario, this SKU-Store assortment plan needs to
follow probabilistic distribution.
The output of this optimized assortment plan, with mean and variances, forms the input for pre pack
configuration definitions.
Figure 10 Optimized Probabilistic Assortment Plan

Development of an optimized assortment plan, along with service levels and pre pack template definitions,
fulfills the pre season activity set for pre pack optimization. These steps form the foundation for the
subsequent in season steps.

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Figure 11 Pre Season Pre Pack Optimization Steps

3.2

In Season Steps

After the pre season steps are developed, the two steps of configuring the purchase order into pre packs
and allocating pre packs from distribution centers to stores are performed.
3.2.1

Order Configuration in Pre Packs

Purchase orders are raised against the open-to-buy derived from the assortment plan. In pre packing,
these orders consisting of an SKUQuantity assortment plan for each vendor have to be configured in terms
of pre packs rather than individual SKU-Quantities. In a scenario in which the vendor is ready to ship as
soon as the order is received, the purchase order raised needs to specify the pre pack configurations. But in
a scenario where there is a significant time lag between the instant the order is received and the moment
the vendor starts shipment, the initial order can be sent in terms of aggregate SKU-Quantity, and pre pack
definitions can be sent just before the packing stage starts at the suppliers point. This would ensure that
the pre pack decision is taken as close to the actual demand as possible.
As an output of this model, the assortment plan is clubbed into pre pack configurations and after this point,
pre packs become the lowest level of packaging hierarchy. The pre pack configurations map the whole
assortment plan and fit into the Store-SKU-Quantity demands. The key element in this step is to determine

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the composition of each individual
pre pack and the total number of
such pre packs used. The size of
every pre pack would be equal to
one of the pre pack sizes defined in
the pre pack template. With respect
to composition, the pre packs may
show some of the following
characteristics:

Figure 12 Order Configuration into Pre Packs

A particular pre pack may

contain SKUs required for a
particular store or a group of
stores. Packing together of SKUs that are meant for different stores increases the chance of opening.

Pre packs may contain SKUs of a particular style, size or color. Generally, SKUs are characterized first
by style and then by size and color. Even if there are no constraints due to pre pack template
definition, pre pack configurations may have SKUs that differ in color and size, but belong to the same
style.

Fast-moving SKUs may be clubbed together or in some pre packs, there could be a number of fastmoving SKUs together with a few slow-moving SKUs. Slow-moving non-critical SKUs may not be
clubbed together in pre packs, as this may create excess inventory in stores.

An important decision taken at this point

is whether to ship everything in pre
Figure 13 Pre Packs Mapped on Assortment Plan
packs or ship some individual units that
are left out after pre packing. There
may be cases in which pre pack
configurations
are
not
able
to
completely map the assortment plan
and some individual SKUs remain. In
such a scenario, either the remaining
SKUs can be sent individually or the
assortment plan modified a little bit so
that an integral number of pre packs
closest to the assortment plan are
shipped. In most cases, for ease of
operations, the assortment plan is modified a little bit to allow all shipment to happen in integral pre pack
numbers. Another option may be to hold back the individual SKUs to be shipped in the next period. In
cases where shipments are frequent due to slow-moving or non-critical SKUs, this option requires serious
consideration.

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3.2.2

Pre Pack Allocation to Stores

When the pre packs reach the distribution centers, demand from stores is closest to the actual consumer
demand. The accuracy of the assortment plan is tested at this instant. If the assortment plan is totally
accurate, allocation is the same as the assortment plan, and this is a straight flow through process. But the
assortment plan being probabilistic, in most cases, actual store allocation from distribution centers differs
from the assortment plan. This variance introduces complexities at two levels.

The overall Store groupSKU group demand at the time of allocation may differ from the demand
forecast. If this deviation is significant, either excess inventory or shortages are inevitable, whether pre
packing is done or not. Inaccurate demand forecast is an input which causes a major portion of excess
inventory or shortages, and thus the pre pack optimization process needs to have as accurate a
demand forecast as possible. Using pre packs, some inaccuracies in forecast can be smoothened, but
the utility of pre pack optimization in a widely inaccurate demand forecast scenario is compromised to a
great extent.

The overall Store groupSKU group demand at the time of allocation may not vary significantly, but
actual SKU-Store allocation may be widely different from the assortment plan output. This is a result of
inaccurate assortment planning something which requires regrouping of SKUs at distribution centers
and revised allocation. Using an un-optimized assortment plan as an input to pre packing may
necessitate the opening of pre packs for reallocation of SKUs, in case the plan is way off target. The
utility of assortment optimization lays in the fact that it goes a long way in reducing variances in the
assortment plan to allocation figures.

With an optimized assortment plan used as input for pre pack configurations, reallocation at the level of
entire pre packs rather than individual SKUs becomes much more feasible. The decision at this level is to
allocate the pre pack stocks received according to the deterministic store allocation demand. The best
situation is when all store demands can be fulfilled in an integral number of pre packs. If this is not the
case, a decision may be taken to hold back entire pre packs at distribution centers and ship lesser SKUs to
stores than demanded, or
Figure 14 Pre Pack Allocation to Stores
to ship entire pre packs to
stores with more SKUs than
demanded. The third option
is to open pre packs and
ship
individual
units.
Stocking/allocation
decisions are based on the
cost of opening pre packs,
handling individual units,
holding
stock
at
a
warehouse, as well as
overstocking/under stocking
at retail stores.

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Pre Pack Optimization White Paper

The result is the mapping of pre packs to the allocation required.
Figure 15 Store Allocation Mapped in Pre Pack Terms

4 Concluding Remarks
The intent of pre pack optimization is to eliminate handling of individual SKUs throughout the supply chain.
In the pre packing context, individual units may appear at the time of ordering or at the time of shipment
from vendors to distribution centers, or at the time of opening of pre packs to allocate SKUs for fulfilling
store demands. These touch points in the supply chain require various decisions to be taken so that overall
handling of individual units is minimized. In the modularized, step-by-step approach taken to achieve this
purpose, there is an effort to answer the right questions at the right time in the supply chain, so that the
efficiency of the overall process is enhanced. These modules appear as independent pieces but are actually
part of a unified picture because the fundamental assumptions, inputs and constraints used at each step
are the same. Through simulation of each module and feedback of one module output to another, the
optimization outputs coming out of each module are refined in order to give enhanced benefits.
Furthermore, the underlying objective in developing all these modules is to eliminate individual SKUs from
the supply chain and use pre packs as the lowest level of packaging hierarchy. By a systematic and stepwise approach, this objective is attained.

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5 Appendix: Mathematical Modeling
The optimization models developed for the whole process of pre pack optimization have been based on an
understanding of theoretical Operations Research problems, and their adaptation for the modeling tasks at
hand. While pre pack optimization modeling for an individual industry and business case would have its
own characteristics, all the models would inherently follow a similar fundamental approach. The objective of
this section is to illustrate that fundamental mathematical approach towards pre pack optimization.

5.1

Pre Pack Template Definition

Problem Statement
A template is defined as the capacity of a carton that is used to pack SKUs. At this level, all SKUs of a
particular style are considered identical. Past data for allocation made to different stores for each style and
for order sizes placed to vendors for each style is available. Individual units of a style have to be grouped
into cartons of different capacities. Thus, most of the units can be packed in the cartons. The objective of
this exercise is to find out the optimum carton sizes for each vendor within which the pre packs to be
ordered can be defined.

Theoretical Reference
This problem is similar to a number of Operations Research problems, such as lot-sizing in a multi-echelon
inventory system, as well as a multidimensional bin-packing problem. In essence, both template definition
and order configuration optimization modules work with similar theoretical references. The overall decision
of determining the size of pre packs and composition is broken up. Template definition focuses on
determining sizes, while order configuration determines composition. Thus, template definition turns out to
be a special and simplified case of a three- dimensional bin-packing problem, where the objective is to
determine a minimum number of bin sizes in which smaller three-dimensional rectangular boxes can be fit.
There are also elements of the multi-echelon lot-sizing problems in this case, as the bins (or pre packs)
have to fulfill the past demand data of each store at a disaggregate level, that is, without opening the bins.

Modeling Constructs
Inputs
1. Supplier/retailer agreement on style/color/size variety permissible for each pre pack. It is assumed that
a template is defined for all styles supplied by the vendor.

Vendor V produces styles Style 1 Style 2 Style n. It is assumed that a single set of pre pack
sizes has to be developed for all styles produced by vendor V.
2. Past data on order sizes and allocation. It is assumed that data is available on the past y number of
years for order sizes placed and allocation to individual stores.

For vendor V, there is data on quantities ordered in each order in the past y years.

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For all styles manufactured by vendor V, there is data on quantities of each style allocated to each
store for the past y number of years.

Constraints
1. It is assumed that the maximum number of templates that can be defined is fixed.

For a particular vendor V, there can be only p numbers of template sizes defined.
2. There is a cap on the maximum number of units in a particular pre pack template. This is based on the
fact that any pre pack capacity cannot be too large, as handling it would be impossible.

Let us assume that for a particular vendor V, a pre pack template cannot contain more that r
number of individual units.

Objective Function
The number of different pre pack sizes has to be optimized so that the sizes are a best fit with the past
allocation to each store as well as the order sizes for each style.

Define different sizes X (X1, X2, a maximum of p sizes) so that
a. The past allocation demand from stores for the style group shipped by vendor V is fulfilled in the
sizes defined to the maximum level.
b. Past order sizes can be grouped into the sizes defined to the maximum level.
c. In both cases, the total number of individual units remaining after grouping into sizes defined has
to be minimized.

Desired Output
A set of pre pack sizes for each vendor X (X1, X2, a maximum of p sizes)

Assumptions
1. The first level of assumptions is that all the inputs defined above are available and constraints are
provided in quantitative terms.
2. Each individual unit (a pair of shoes in its own box) is of the same dimensions.
3. It is assumed that all styles manufactured by a vendor can be packed into one carton. If that is not the
case, carton sizes specific to those styles which can be packed in one carton size would have to be
developed.

5.2

Assortment Optimization

Problem Statement
There is a weekly demand forecast for a particular style for a particular group of stores. Each style can be
disaggregated in terms of color and size SKUs. The SKU groupStore group demand forecast has to be
disaggregated in terms of probabilistic SKU-Store forecast based on past data available from stores on their
SKU sales as well as their service level requirements.

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Theoretical Reference
Assortment Optimization is a developed field of Operations Research, with various streams of thought being
published. One stream focuses on the problem of an optimal assortment that produces the best fit with
consumer demands. It attempts to determine the assortment depth and breadth catering to as much
variety in consumer demand as possible. For the purposes of this document, it is assumed that decisions on
breadth and depth of assortment have already been carried out, and that the focus is on the distribution of
the overall demand into SKU-Store combinations, developing the assortment matrix as discussed. This is
essentially a variation of the curve-fitting problem in which data extrapolation is done to fit the curves
developed based on past data. From demand forecast, the aggregate projected probabilistic demand
functions of a group of SKUs to be sold through a group of stores are calculated. Based on past SKU sales
data from each store, the SKU demand curves for each store can be constructed. The approach is then to
fit the SKU probabilistic demand functions into each of the Store-SKU demand curves, so that the
aggregate SKU demand equals what is forecasted.

Inputs
1. Weekly Demand Forecast
a. Assumption: Style A can have n number of color/size variations. Thus the forecast would be for
SKU group A that has n number of SKUs. The SKU group A denotes all the color-size
variations (n number) for the Style A.

SKU group n contains all SKUs with Style A colors and sizes may vary within that style,
giving n number of SKUs.
b. Assumption: The forecast is for s number of stores.

s number of stores can be in one channel or area for which the forecast is made.

Forecast for n SKUs for s stores = f (D), where f (D) may be a probabilistic function obeying a
given distribution. It is assumed here that this demand would follow normal distribution with
mean D and Std. Deviation d. This demand can be readily assumed to follow some other
distribution function and the equations derived would change accordingly.
2. Past data on allocation of each SKU/similar SKUs for each store.
a. For each SKU among the n SKUs for which the demand forecast has been made, past sales data
from each store (from the s number of stores) is available.

3. The service levels to be maintained at each store are provided. Based on the demand distribution
(whether it follows normal distribution or some other one), the minimum stock requirement for a
particular service level can be calculated.

Let us assume Qij is the stock of SKU i (which can vary within the n number of SKUs in the
group) for Store j (which can vary within the s number of stores in the group). Thus Qij(sl) is
the minimum stock requirement for the SKU to meet the service levels.

Constraints
1. Total demand for all SKUs for all stores within the group has to be equal to the forecast demand.

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F(Qij), the planned stock of SKU I for store J is a probabilistic quantity having the same probabilistic
distribution as the demand f(D).
Sum of all f(Qij) distributions would be equal to f(D) distribution.

2. Demand for each SKU-Store combination falls within the range of demand projections done on the
basis of past SKU-Store allocation data.

Time Series analysis of past demand for each SKU-Store combination-analysis of base, trend and
seasonality would provide demand curves demand = f(time) for all SKU-Store combinations.
These demand curves would have a tolerance level of T. The probabilistic demand functions for
future demand for each SKU-Store combination-f(Qij) would have to fall within the tolerance range.
3. Service levels at stores have to be met.

Allocation Qij, the instance of the distribution f(Qij) >= Qij(sl) for all stores and SKUs.

Objective Function
Determine optimal quantity of each SKU to be kept in each store to be able to fulfill the service levels.

Determine the probabilistic functions f(Qij) for all SKUs and stores within the group so that service
levels are met and the sum of all the individual distributions is equal to the demand function f(D).

Mathematical Model
Number of stores in the store group for which the demand forecast is available = s
Number of SKUs in the SKU group for which the demand forecast is available = n
Qij = demand for SKU I for Store j

Inputs
Qij for all past periods
Demand forecast = i j(qij) = D (D is a probabilistic demand and all the equations have to be expressed
in terms of probabilistic demand)
Service levels for each store within the group

Model
Determine qij for all I = 1-n and j = 1-s
So that:
D is fulfilled and service levels are met

5.3

Order Configuration into Pre Packs

Problem Statement
A number of SKUs of a particular style have been ordered from vendor V. The probabilistic allocation of
each SKU for each store is available. The cost of handling pre packs and the cost of handling individual
units is known. The cost of handling of individual units is very large compared to the cost of handling pre
packs. Pre packs should be defined so that most of the flow of items happens in terms of pre pack units
and handling of individual units is minimized. A pre pack definition would mean selecting a combination of 1
to n number of SKUs for a particular style and selecting quantities for each SKU so that the total number
of units in the definitions equals one of the pre pack sizes defined in the template.

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Theoretical Reference
This module handles the second part of the overall pre packing problem of determining the composition of
each pre pack configuration for which sizes are determined by the template definition. This problem also
finds references in a variety of Operations Research problems such as three-dimensional cutting stock
problems, lot-sizing in a multi-echelon inventory situation, as well as cutting stock problems for cutting a
large two-to-three dimensional sheet in smaller pieces, so that waste leftovers from the large sheet are
minimized. This problem also finds similarities with the lot-sizing and batch-ordering problems in
probabilistic/deterministic demand scenarios, where orders have to be configured into batches for an
overall probabilistic or deterministic demand. The fundamental objective in our situation is to configure an
overall assortment into smaller blocks of distinct SKUs that can be ordered as lots or batches and that can
flow through the multi-echelon supply chain without getting opened. The modeling for the fulfillment of this
objective takes best practices from all the modeling exercises mentioned.

Modeling Constructs
Inputs
1. Probabilistic demand for each SKU for each store from the assortment plan.

F(Qij) is known for each SKU-Store combination for SKUs.
2. Total order placed for each SKU aggregated for all stores.

For the vendor V, total orders placed for each SKU shipped is known.
3. Cost of handling of pre packs and handling of individual units.

Let us assume a uniform cost Cp of handling all individual units packed into pre packs, and a
uniform cost Cu of handling all individual units handled individually. These costs are summation of
all costs throughout the process for pre packs as well as individual units. It is assumed that Cu is
much larger than Cp.
4. Service levels to be maintained at each store.

Qij(sl) for all SKU-Store combinations is known.

Constraints
1. Demand for each store has to be fulfilled within the permissible service levels.

The total demand for a particular store, summed over all SKUs and for all vendors, has to be
fulfilled so that Qij(sl) for all SKUs within the store is fulfilled.
2. The sizes of pre packs defined can only be among the ones given in the templates.

If xij is the number of units of SKU I stocked in pre pack j, then for a particular pre pack definition
j, the sum of individual units of all SKUs present in it has to be equal to one of the pre pack sizes
as developed in the template module X (X1, X2, a maximum of p sizes).
3. The sum of quantities of a particular SKU aggregated over all pre pack definitions configured in the
order have to be equal to the total order quantity of that SKU.

If xij is the number of units of SKU I stocked in pre pack j, then for a particular SKU I, the total
number of units packed into all pre packs of different combinations has to be equal to the quantity
ordered for the SKU.

Objective Function
Minimize overall cost of handling inventory by maximizing ordering and shipment in pre packs.

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If each pre pack definition PPj has Nj number of units in the configured order, the total cost of handling
of all pre packs would be Cp times the total number of individual units packed in pre packs of all
definitions for the order. If is the total number of individual units left over after pre pack
configuration, the total cost of handling individual units would be Cu times . The objective is to
minimize the total cost of handling. While doing so, the lower cost Cp would ensure that most units are
handled in pre packs and opening of pre packs to handle individual units is minimized.

Mathematical Model
Inputs
X, where X is an element of the set of pre pack sizes (capacities available)
P = number of different pre pack definitions (a decision variable)
PPj = pre pack definition j, 0 =< j =<P (total number of pre pack definitions can be P)
Xij = number of units of SKU i in PP j
0 =< Xij =<X (minimum number of items of a particular SKU in a particular pre pack can be zero,
meaning that SKU is not defined within that pre pack. Maximum number can be equal to the pre pack size,
meaning only that SKU is defined for that pre pack)
Nj = number of pre packs of j type in an order (an order can have many units of the same pre pack
definition. Nj signifies the number of each pre pack definition that the order to be configured would
contain)
Cp = cost of handling of pre packs
Cu = cost of handling of individual units (Cu>>Cp)
= total number of individual units handled in the system
Model
Minimize total cost Z = Cp (
(over j=1-p) (nj)) + Cu

So that, for all k (k=one store)

(
(over j=1-p) ((nj)(
(over i=1-n)(xij)) ) + (
(over i=1-n)( I)) = i Dik
Where, Dik = demand for a SKU I for store k

5.4

Optimizing Allocation to Stores

Problem Statement
The supplier has sent stocks in pre pack definitions sent during ordering. The cost of stocking pre packs as
well as the cost of stocking individual units at the store and at the warehouse is known. A pre-determined
service level fixed for each of the stores needs to be maintained. At this stage, the actual deterministic
demand for each SKU for each store is available. The allocation of stocks to each store has to be decided
upon, to maintain service levels while minimizing the handling of individual units.

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Theoretical Reference
This problem is essentially about the distribution of lot-sized inventory in a single source-multi-sink
distribution scenario. The distribution center acts as the single source, while there can be n number of retail
stores acting as the sink. This is close to a standard OR problem of lot-sizing in a single warehouse multiretail inventory scenario. The key difference here is that the problem has to be solved with a predetermined set of lots that have been defined in the pre pack template definition and order configuration
stages. The approach here is to simulate these modules and feedback outputs of allocation to the pre pack
configuration modules, so that pre pack configuration outputs are refined to cater to allocation scenarios.

Inputs
1. Total number of different pre packs as well as individual units received from supplier.

There are Nj number of pre packs each of definition PPj that have been received at the distribution
center from supplier. Each PPj contains SKUs I in quantities xij. In addition to them, there are
number of individual units received from supplier which couldnt be packed in pre packs.
2. Demand from each store for each SKU.

Actual allocation demand Qij (deterministic) for each SKU-Store combination at the distribution
center.
3. Service level to be maintained at each store Qij(sl) is known for each SKU-Store combination.
4. Cost of stocking pre packs and individual units at warehouse and retail store points.

Holding cost of inventory, in pre packs as well as individual units, is known for DCs and stores.

Constraints
1. Allocation has to meet service levels.

Allocation Qij >= Qij(sl)

Objective Function
Minimize the overall cost of stocking in the Warehouse-Store part of the chain, while maintaining a
minimum quantity of stocks at the stores to meet service levels.

Total cost of stocking is equal to the cost of stocking at DC plus the cost of stocking at each store.
Stocking can be done either in pre packs or individual units after breaking of pre packs. The total cost
function is calculated. It needs to be minimized in a way that the minimum in-store allocation for each
SKU-Store combination is equal to or greater than that required for meeting service levels.

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6 References
1. Dong, Ling Xiu and Hau L. Lee. Optimal Policies and Approximations for a Serial Multi-Echelon
Inventory System with Time-Correlated Demand. Operations Research, 2003 INFORMS 51.6 (2003):
969980.
2. Gramani, Maria Cristina N. and Paulo M. Franc. The Combined Cutting Stock and Lot-Sizing Problem in
Industrial Processes. European Journal of Operational Research (2005).
3. Lodi, Andrea, Silvano Martello and Michele Monaci. Two-Dimensional Packing Problems: A Survey.
European Journal of Operational Research 141 (2002): 241252.
4. Belvaux, Gaetan and Laurence A. Wolsey. Modeling Practical Lot-Sizing Problems as Mixed-Integer
Programs. Management Science 47.7 (2001): 9931007.
5. Ryzin, Garrett van and Siddharth Mahajan. On the Relationship between Inventory Costs and Variety
Benefits in Retail Assortments. Management Science 45.11 (1999): 14961509.
6. Pentico, David W. The Discrete Two-Dimensional Assortment Problem. Operations Research 36.2
(1988).
7. Martel, Alain. A Probabilistic Assortment Problem. Management Science 15.2 (1977).
8. Schwarz, Leroy B. A Simple Continuous Review Deterministic One-Warehouse N-Retailer Inventory
Problem. Management Science 19.5 (1973).
9. Roundy, Robin. 98% Effective Integer Ratio Lot-Sizing for One-Warehouse Multi-Retailer Systems.
Management Science 31.11 (1985).
10. Lodi, Andrea, Silvano Martello and Vigo Daniele. Heuristic Algorithms for the Three-Dimensional BinPacking Problem. European Journal of Operational Research 141 (2002): 410420.
11. Elmaghraby, Salaii E. and Vishwas Y. Bawle. Optimization of Batch Ordering under Deterministic
Variable Demand. Management Science 18.9 (1972).

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7 About the Authors
Inderlal Singh Chettri
Inderlal Singh Chettri is a Consulting Manager with Cognizant Retail Business Consulting Practice. He has
more than twelve years of work experience in consulting and sales and marketing. In Cognizant, Inder
manages the retail consulting practice in Calcutta. He is actively involved in providing domain inputs to
clients as well as client teams. He has also led a number of consulting assignments, such as Business
Impact Analysis and Vendor Product Evaluation. Prior to Cognizant, Inder was a business consultant in the
retail domain with Infosys Technologies and Kurt Salmon Associates. Inder is a post graduate (PGDM) from
the Indian Institute of ManagementCalcutta and a graduate (B.Tech) from the Indian Institute of
TechnologyKharagpur.
Inder can be reached at inderlalsingh.chettri@cognizant.com
Divyanshu Sharma
Divyanshu Sharma is a Senior Business Analyst with Cognizant Retail Business Practice. He has more than
two years of consulting experience in the Retail and Supply Chain. At Cognizant, Divyanshu has been
involved in projects ranging from Business Process Mapping to Merchandise Management and UCCnet for
major grocery and general merchandise clients. He has also been involved in Price Optimization and
Domain Training. Prior to Cognizant, he worked with i2 Technologies implementing i2 retail products for its
clients. Divyanshu is a post graduate (PGDM - MBA) from the Indian Institute of ManagementCalcutta and
a graduate from National Institute of Technology Bihar.
Divyanshu can be reached at divyanshu.sharma@cognizant.com
About Cognizant:
Cognizant (NASDAQ: CTSH) is a leading provider of IT services. Focused on delivering strategic
information technology solutions that address the complex business needs of its clients, Cognizant
provides applications management, development, integration, and re-engineering, infrastructure
management, business process outsourcing, and a number of related services such as enterprise
consulting, technology architecture, program management, and change management through its
onsite/offshore outsourcing model.
Cognizant's more than 19,000 employees are committed to partnerships that sustain long-term, proven
value for customers by delivering high-quality, cost-effective solutions through its development centers
in India and onsite client teams. Cognizant maintains P-CMM and SEI-CMM Level 5 assessments from an
independent third-party assessor, was recently named Forbes' Best Small Company in America for the
second consecutive year, and ranked among the top information technology companies in
BusinessWeek's Hot Growth Companies. Further information about Cognizant can be found at
http://www.cognizant.com.

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