Reducing supply risks by supply guarantee deposit payments in the fashion industry in the “new normal after COVID-19”

Abstract

Under COVID-19, lots of supply disruption cases have appeared which highlight the importance of supply risk management. In this paper, we explore the commonly seen “supply guarantee deposit payment (SGDP)” scheme in fashion supply chains with production disruptions. Under the SGDP scheme, the apparel manufacturer guarantees the fashion retailer that it will supply the product on time by paying a certain amount of deposit to the fashion retailer with consideration of interest rate. In return, the apparel manufacturer requests a certain minimum ordering quantity (MOQ) in the supply contract. We first consider the case with a single product and then extend the analysis to the multi-product case. We find that the SGDP scheme can achieve win-win channel coordination for the fashion supply chain in the presence of production disruption and we have identified the respective bounds for the required amount of deposit payment. The range for setting the channel coordinating deposit payment under SGDP, depending on the size of the quantity difference after the adoption of SGDP, may increase or decrease when the chance of production disruption increases. With uniformly and normally distributed demands, we further derive the value of supply chain coordination under SGDP from the perspectives of the retailer, manufacturer and the whole supply chain, respectively. The critical influence factors in fashion supply chains are also uncovered. To achieve win-win channel coordination for the fashion supply chain with n different products using SGDP, we prove that it is sufficient if we can control n + 1 contract parameters. Moreover, we show that the MOQ is critical in order to achieve channel coordination, no matter the fashion retailer is risk neutral or risk averse. Finally, we check the robustness of our main results by considering the degree of damage of disruption. The findings would have good implications for the new normal after COVID-19.