Price differentiated channel switching in a fixed period fast fashion supply chain

Abstract

Fashion products are characterized by short product life cycles and high market success uncertainty. An unsuccessful product requires multiple price discounts to clear inventory. Fast-fashion retailers use a variety of strategies to counter these uncertainties including: frequently changing collections, quick response sourcing, and data driven channel switching. This paper proposes a switching solution for the Fast Fashion Supply Chain (FFS) of retailers who have preordered an initial or block inventory, and plan to use channel switching as opposed to multiple discounting steps. We consider a retailer which ships product from a central warehouse to store/clearance and outlet channels. The FFS Multi-Channel Switching (MCS) problem then is to monitor market demand data, such that at the optimal period the store inventory is switched to clearance, and the warehouse inventory is switched to the outlet channel. Using a linear projection of the moving average demand trend, we estimate the remaining cycle revenue at any time in the cycle. Channel prices are fixed, and the remaining revenue is a concave function of switching time. Using a set of conditions the objective is further simplified into cases. The Linear Moving Average Trend (LMAT) heuristic prescribes whether a channel switch should be made in the next period. The LMAT was compared with the optimal decision, the No-Switch rule and an intuitive heuristic using a simulation experiment. The LMAT performed well and for most problems provided a solution within 0.4% of the optimal. Confirming the LMAT can readily and effectively be applied to real time decision making in a FFS.