Elsevier

Omega

Volume 52, April 2015, Pages 1-14
Omega

Quick response and supply chain structure with strategic consumers

https://doi.org/10.1016/j.omega.2014.10.006Get rights and content

Highlights

  • We study four types of supply chains with strategic customer behavior.

  • Value of quick response might be greater in centralized supply chains.

  • Revenue-sharing contracts only have limited flexibility with strategic consumers.

  • Both decentralization and quick response help to restrict the initial inventory.

Abstract

This work explores the impact of quick response on supply chain performance for various supply chain structures with strategic customer behavior. By investigating pricing and inventory decisions in decentralized supply chains under revenue-sharing contracts and in centralized supply chains, we study the performance of four various systems and compare the value of quick response in different supply chain structures. The results show that if the extra cost of quick response is relatively low, the value of quick response would be greater in centralized systems than in decentralized systems. On the other hand, if the extra cost is high, decentralized supply chains reap more incremental profits from adopting quick response. We also find that revenue-sharing contracts enable a decentralized supply chain to outperform a centralized supply chain, but only allow limited flexibility of allocating total profits between a manufacturer and a retailer.

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 p. 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 (w1,w2,ϕ). 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 q to place an initial order and the wholesale price for each product is w1 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 (w,ϕ) 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).

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