Fast Fashion Systems

Chapter 6

Coordination of a fast fashion supply

chain with profit-loss sharing contract

Ke Wang

1

, Qinglong Gou

1

, Ling Yang

1

& Siqing Shan

2

1

School of Management, University of Science and Technology of China, Hefei,Anhui, P.R. China

2

School of Economics and Management, Beihang University, Beijing, P.R. China

SUMMARY

In a fashion market, the changing fashion trends and volatile consumer demand require

the supply chain to have more quickness in production and more accuracy in fore-

casting of the market demand. In this paper we propose a profit-loss sharing contract

(PLSC) on a fast fashion supply chain under which the manufacturer shares the retailer’s

profit with one percentage, and the retailer’s loss with another percentage, in the pres-

ence of forecasting bias (FB) by the retailer. As a benchmark, we first consider a model

in which no FB exists and the traditional revenue sharing contract (RSC) is utilized to

coordinate the supply chain. For this case with the assumption of no FB, we calculate

optimal solutions for retail price, quality investment, and production. Then FB is con-

sidered in resolving the above optimization problems and the PLSC is introduced to

coordinate the supply chain. After that, we compare the PLSC with the RSC, focusing

particularly on their differences. We find that the PLSC is more general in achieving

coordination and more flexible than the RSC for the manufacturer in decision mak-

ing, although the two types of contracts are equal under certain conditions. Finally,

numerical examples are offered to illustrate our results.

Keywords

Forecasting; Supply chain coordination; Fashion industry; Game theory; Contract

6.1 INTRODUCTION

Fast fashion is a very popular industrial practice in these years and the firms in the

fashion apparel industry (e.g. Zara, H&M and Benetton, etc.) have used this concept

widely in their operation practice. Generally speaking, fast fashion refers to the concept

of shortening production and distribution lead times and highly fashionable product

design (Cachon and Swinney, 2011). To be specific, shortening lead times means the

firm can revise its production flexibly and highly fashionable product design means

the product should conform to the fashion trends – in other words the product should

satisfy the demand of consumers. Above all, for a volatile market (especially the fashion

market), forecasting the consumer’s preference is the key in decision making of a