Improving Store Liquidation

Store liquidation is the time-constrained divestment of retail outlets through an in-store sale of inventory. The retail industry depends extensively on store liquidation, both to allow managers of going concerns to divest stores in efforts to enhance performance and as a means for investors to recover capital from failed ventures. Retailers sell billions of dollars of inventory annually during store liquidations. This paper introduces the store liquidation problem to the literature and presents a technique for optimizing key store liquidation decisions, including markdowns, inventory transfers, and the timing of store closings. We propose a heuristic for solving the store liquidation problem and evaluate the performance of this method. Through applications, we show that our approach could improve net recovery on cost (i.e., the profit obtained during a liquidation stated as a percentage of the cost value of liquidated inventory) by two to five percentage points in the cases we examined. Further, we discuss ways in which current practice in store liquidation differs from the decisions identified by our method, and we trace the consequences of these differences.