Fast Fashion Systems

Chapter 5

Flexible procurement models for fast

fashion retailers

Do˘gan A. Serel

Department of Management, Ipek University, Çankaya,Ankara,Turkey

SUMMARY

We describe how inventory management models utilizing Bayesian estimate of cus-

tomer demand can help retailers to determine profit-maximizing stocking levels for

fashion products. In the basic framework, the retailer can place two different purchas-

ing orders for a fashion product before the selling season. The demand for the product

is uncertain. The first order is placed using a coarse demand forecast. Following the

gathering of new market information, relying on a more refined forecast of poten-

tial demand, a second “quick response’’ order is placed at a higher unit supply price

compared to the first order. The total stocking quantity for the product equals the

sum of the two orders. The retailer’s objective is to maximize its expected profit by

avoiding unnecessarily high investment in inventory. We discuss finding the optimal

procurement strategy in this practical business problem. We review a number of pub-

lished papers exploring various issues related to this basic setting. The extensions of

the basic model explored in the previous literature include uncertainty in purchase cost

associated with the second order, availability of order cancellation flexibility, limited

procurement budget, stocking assortment containing multiple products with correlated

demands, and price-sensitive retail demand.

Keywords

Quick response; Fashion marketing; Newsvendor; Bayesian estimate; Forecast update

5.1 INTRODUCTION

It is well-known that market demand for fashion goods is highly unpredictable. Because

generally there exists only a single selling season for these goods and inventory cannot

be carried into future periods, the costs due to end-of-season clearances or unsatisfied

demand (shortages) can be quite high. One of the pillars of the fast fashion business

is the use of the latest demand information available for determining the stocking

quantities of fashion goods. The use of more accurate demand forecasts helps reduce

the financial loss resulting from overstocking or understocking. In general, the shorter

the time until the start of the selling season, the lower the error in estimating the

market demand for a fashion good. Thus postponing the procurement order until the