Launching the right new product among multiple product candidates in fashion: Optimal choice and coordination with risk consideration

Abstract

In the fashion industry, fashion retailers face a common problem of selecting the right new product for the upcoming season. This problem is, unfortunately, a very difficult one because demand for the new product is largely unknown and highly volatile. As a result, fashion retailers face a high level of risk in making the new product selection decision. Motivated by this industrial challenge, we investigate the new product selection and coordination problem in a fashion supply chain with a risk averse fashion retailer. To be specific, we explore a two-period problem in which the fashion retailer has to select one fashion product among multiple product candidates at Period 1 when demand forecast is highly unknown. After that, the fashion retailer decides the optimal ordering quantity for the selected new product at Period 2 when demand forecast is better known. In the basic model, when there is no fixed cost for product acquisition, we prove that the optimal new product selection depends highly on the forecasted mean of product demand, and the optimal choice made by the fashion retailer is also optimal for the fashion supply chain system. However, owing to the fashion retailer’s risk averse attitude and the double marginalization effect, the fashion retailer’s ordering decision is not the best for the fashion supply chain. As a result, we propose a novel markdown sponsor tariff (MST) contract to achieve the two-level supply chain coordination. In the extended model, when we consider the presence of a fixed cost (e.g., licensing fee), the situation is more complex. In general, the MST contract will fail to achieve the two-level supply chain coordination under the extended model. We hence develop an alternative measure, based on the sales rebates tariff (SRT) contract, to coordinate the new product selection and order quantity decisions in the fashion supply chain.