Quick response and supply chain structure with strategic consumers☆
Introduction
As firms in the apparel industry and beyond pay increasing attention to quick response [1], they face essential decisions on the structures of their supply chains: centralized supply chain or decentralized supply chain? Different companies may choose different structures. For example, Zara is quite famous for constructing a highly integrated supply chain [2], [3]. It makes much effort to shorten the supply chain, including striving to own and manage all the stores [4]. H&M, by contrast, keeps a long supply chain. Its products are totally manufactured by independent suppliers [5]. It sources a lot from distant areas like Asia, where the production cost is low [6]. Mango, an international fast fashion company having presence in more than 100 countries [7], also operates a decentralized supply chain. The majority of its shops are franchise outlets [8]. A natural question to ask is: which system is likely to reap more incremental benefits from adopting quick response? It is for sure that a well devised supply chain system would help to exploit quick response capabilities.
Quick response is an operational strategy designed to reduce lead times and improve supply flexibility [1], [9]. It utilizes a range of technologies (such as enhanced information systems, and expedited logistics operations) to achieve its goal. In the middle 1980s, the first adoption of quick response took place in the apparel industry in the United States. Now quick response is successfully implemented in various industries. Zara, H&M, and Adidas are among the companies that invest in building quick response capabilities [10]. The benefits of quick response are well acknowledged [1], [11], [12]. Retailers in supply chains with quick response are able to adjust their ordering quantity rapidly, according to the market demand information gathered. Quick response enables firms to avoid overproduction, ensure low inventory levels, and counteract strategic customer behavior [13]. Furthermore, it is known that the value of quick response for a retailer, which is measured in terms of profit increment, is greater with strategic consumers than without [9]. Nevertheless, there is little research investigating the impact of quick response on the performance of decentralized supply chains with strategic consumers. So we aim to bridge this gap in the literature and answer the question we raise above.
In this paper, we analyze the decisions made by different members in various supply chain structures, and then compare the value of quick response in centralized systems with that in decentralized systems. Building upon the newsvendor model with strategic customers proposed in [14], our model considers four types of supply chains, namely: (1) decentralized supply chain without quick response, (2) decentralized supply chain with quick response, (3) centralized supply chain, and (4) centralized supply chain with quick response. In the absence of quick response, Su and Zhang [14] study the performance of supply chains taking into account strategic customers. They find that a decentralized supply chain could outperform a centralized supply chain under an appropriate wholesale price contract. The decentralized systems in this paper are governed by revenue-sharing contracts instead of wholesale price contracts. Revenue-sharing contracts have been extensively studied and could be viewed as generalized versions of wholesale price contracts [15]. We would like to examine whether revenue-sharing contracts could help to achieve optimal supply chain performance. Our model begins with a decentralized supply chain, in which we analyze the retailer’s decisions and the parameters in revenue-sharing contracts. Next we extend the model to incorporate quick response. To compare the value of quick response in alternative supply chain structures, we then introduce centralized systems, both with and without quick response. Further, we study the inventory decisions and the performance of the four supply chains, and then investigate the value of quick response both in centralized systems and in decentralized systems, analytically and numerically.
We now provide the main findings. First, we show that with strategic consumers, the value of quick response is higher in centralized supply chains than in decentralized supply chains, if the unit cost of products with quick response is close to the unit cost of ordinary products. This is a counterintuitive finding, because according to [9,14], one would expect that quick response would generate more value for decentralized systems. Thus, if a firm could vertically integrate its supply chain and make the best of quick response, thereby effectively reducing the additional cost of quick response, it would make more profits from implementing quick response, compared to a decentralized system. For instance, Zara is reported to have an extraordinary fast supply chain [2], [3]. Chances are it does so well in quick response that its cost of an additional product after observing accurate demand would not be much higher than the unit cost of the initial inventory. However, if the extra cost of quick response is great, decentralized systems would reap more incremental profits.
Second, we find that revenue-sharing contracts are preferred over wholesale price contracts in decentralized supply chains with strategic customer behavior. This is because the revenue-sharing contract not only enables a decentralized system to outperform a centralized system, but also allows alternative allocations of profits between a manufacturer and a retailer. The wholesale price contract, by contrast, is known to only permit a particular division of the profits. Yet, the revenue-sharing contract imposes an upper bound on the retailer’s share of the overall profits generated by the supply chain. In consequence, it fails to allow full flexibility of dividing profits. This is in contrast to the prevailing view that revenue-sharing contracts support arbitrary split of total profits between members within the supply chain. As the retailer’s bargaining power grows, it may accept neither revenue-sharing contracts nor wholesale price contracts.
Third, limiting initial inventory often works well for discouraging strategic customer behavior, provided that the supply chain could convince consumers of its credibility. Quick response, as well as decentralization, would just serve as a means to persuade strategic customers that the supply chain would stick to its decision of low stocking level. We show that the equilibrium inventory is lower in a decentralized supply chain with quick response, compared to in a centralized supply chain with or without quick response. Low inventory levels reduce the possibility for the supply chain to salvage excess products, which increases strategic consumers’ willingness to buy early. The supply chain could thus charge a higher retail price, contributing to the increment of profits.
The remainder of this paper is organized as follows. Section 2 reviews relevant literature. Section 3 introduces the model of a decentralized supply chain. Section 4 extends the model by studying a decentralized supply chain with quick response. Section 5 addresses the model of centralized supply chains. Section 6 compares the performance of various supply chains and investigates the value of quick response. Section 7 presents a numerical study. Section 8 provides discussion, extension and managerial implications. Section 9 offers concluding remarks.
Section snippets
Literature review
Our work is related to three streams of research: the literature on consumer behavior in operations management, the literature on quick response, and the literature on supply chain contracting.
Researchers have recognized the importance of investigating consumer behavior in operations management and built a variety of models [13], [16]. Strategic customer behavior, well studied in economics [17] and marketing [18], [19], [20], is introduced into a supply chain setting by Su and Zhang [14], where
The model
Our model follows [14], [36]. We assume that a single manufacturer sells products through a retailer to consumers over two periods: “full price period” and “salvage price period”. The retailer here is similar to the seller in the newsvendor problem [48] that takes into account strategic customer behavior.
The selling season begins in the full price period, in which the product is sold for a full price . If there is inventory remaining at the end of the full price period, the retailer sells the
Quick response in the supply chain
Here we consider the adoption of quick response in the supply chain, in which the manufacturer and the retailer agree to a revenue-sharing contract . Now, the retailer with quick response capability has two opportunities to submit the product order. Before the start of the selling season, the retailer has to determine to place an initial order and the wholesale price for each product is at this time. As the selling season approaches, more demand information is gathered. At the
Centralized supply chain
This section introduces the model of centralized supply chains. In previous sections, the manufacturer sells products to consumers through the retailer under revenue-sharing contracts. We interpret the model as the decentralized supply chain model. In this section, a firm manufactures products itself and sells directly to its consumers. Therefore, a centralized supply chain consists of a single firm and a mass of strategic customers. Other assumptions about the firm and customers are adopted
Supply chain performance and value of quick response
Here we compare the four supply chains in terms of inventory and performance, and then investigate the value of quick response in alternative systems.
Numerical study
In this section, we conduct a numerical study to analyze the value of quick response in various supply chain settings. Since the equilibrium expressions of the profits are complex, it is quite difficult to explore the magnitude of the value of quick response analytically. To test the robustness of our findings, we provide results not only under revenue-sharing contracts, but also under wholesale price contracts.
In the experiments, we use every possible combination of the parameters shown in
Adoption of revenue-sharing contracts
In previous sections, we make the assumption that revenue-sharing contracts are adopted in decentralized supply chain systems. Here we discuss the reasons for employing revenue-sharing contracts.
Revenue-sharing contracts are closely related to franchise agreements accepted by firms in the apparel industry. A company selecting decentralized supply chain structure usually signs franchise agreements with its partner. Although franchise agreements could vary a lot in franchise systems,
Conclusion
This paper considers the intersection of supply chain management in operations management and consumer behavior in marketing. By studying the performance of various supply chains with strategic customer behavior, we compare the value of quick response in decentralized systems with that in centralized systems. Parties in the decentralized systems agree to revenue-sharing contracts.
Our finding deepens our understanding of revenue-sharing contracts. As a device to facilitate the achievement of the
Acknowledgments
The authors thank the associate editor and two anonymous reviewers for their helpful suggestions that significantly improved the paper. This research has been supported by the National Natural Science Foundation of China (Grants 71202085, 70971095).
References (53)
- et al.
Innovative quick response programs: a review
International Journal of Production Economics
(2010) Supply chain coordination with contracts
A review of marketing-operations interface models: from co-existence to coordination and collaboration
International Journal of Production Economics
(2010)- et al.
A free gift card alternative to price discounts in the newsvendor problem
Omega
(2013) - et al.
Dynamic pricing when consumers are strategic: analysis of posted and contingent pricing schemes
European Journal of Operational Research
(2010) - et al.
Pricing, replenishment, and timing of selling in a market with heterogeneous customers
International Journal of Production Economics
(2013) - et al.
The informational aspect of the group-buying mechanism
European Journal of Operational Research
(2014) - et al.
Double moral hazard in a supply chain with consumer learning
Decision Support Systems
(2012) - et al.
Dynamic pricing in the presence of consumer inertia
Omega
(2012) - et al.
Selecting optimal selling format of a product in B2C online auctions with boundedly rational customers
European Journal of Operational Research
(2013)
Local sourcing and fashion quick response system: the impacts of carbon footprint tax
Transportation Research Part E—Logistics and Transportation Review
Channel coordination in supply chains with agents having mean-variance objectives
Omega
Stability issues in supply chain networks: implications for coordination mechanisms
International Journal of Production Economics
Analysis of the effectiveness of manufacturer-sponsored retailer gift cards in supply chains
European Journal of Operational Research
Fresh-product supply chain management with logistics outsourcing
Omega
Supply chain coordination using revenue-dependent revenue sharing contracts
Omega
The single-period (news-vendor) problem: literature review and suggestions for future research
Omega
Franchising: a review and avenues to greater theoretical diversity
Journal of Management
Supply chain coordination through cooperative advertising with reference price effect
Omega
Pace-setting Zara seeks more speed to fight its rising cheap-chic rivals
Wall Street Journal
H&M looks to source clothing from Ethiopia
Wall Street Journal
Cited by (82)
Dynamic pricing and quick response of a retailer in the presence of strategic consumers: A distributionally robust optimization approach
2023, European Journal of Operational ResearchCitation Excerpt :These studies mainly assumed that the retailer would make an additional order at a higher unit cost than that of the initial order to satisfy the unexpected high demand when the product is out of stock. Yang et al. (2015) compared the value of QR in decentralized and centralized systems with consideration to strategic consumer behavior. Wang et al. (2018) analyzed the effect of QR on the profit of a retailer when considering strategic consumers with risk preference and decreasing valuation.
Supply chain competition models with strategic customers considering sales effort
2022, Computers and Industrial EngineeringThe impact of quantity commitment with disappointment-averse and elation-seeking consumers
2021, Physica A: Statistical Mechanics and its ApplicationsInventory and pricing decisions when dealing with strategic consumers: A comprehensive analysis
2021, Computers and Operations ResearchPricing and advertising in a supply chain in the presence of strategic consumers
2021, Omega (United Kingdom)Accurate response in agricultural supply chains
2021, Omega (United Kingdom)Citation Excerpt :The challenges faced by the seed manufacturer are very similar to those of companies operating in dynamic and innovative industries such as fashion apparel and toys [14,30,32]. Unlike in these industries, however, the deployment of quick response, an operational strategy designed to reduce lead times and improve supply flexibility (e.g., [33], in agribusiness is not feasible due to long supply lead times driven by mother nature. Postponement, another operational strategy commonly adopted in dynamic and innovative industries, on the other hand, is related to the agribusiness problem we study.
- ☆
This manuscript was processed by Associate Editor W. Shen.