Reducing supply risks by supply guarantee deposit payments in the fashion industry in the “new normal after COVID-19”
Introduction
COVID-19 has brought challenges to all kinds of business operations. In particular, the fashion apparel industry is seriously affected.1 The “Apparel, Fashion & Luxury Group” of McKinsey and Company issued a report entitled “Time for Change: How to Use the Crisis to Make Fashion Sourcing More Agile and Sustainable” in May 2020. In the article, the importance of supply chain optimality and financial risk is highlighted. After experiencing the COVID-19 pandemic, it is commonly believed that members of fashion supply chains should very carefully consider how to cope with challenges with risk considerations.2
After the COVID-19 pandemic is basically over, in the new normal, we may still have to expect that there is a real chance for the “come-back” of the COVID-19 pandemic or its variants or another unforeseen pandemic, especially in developing countries3 in which the healthcare situation is usually far from perfect. This point means that significant production disruptions, which may even create the ripple effects [1], would appear from time to time. As a motivational example, consider a fashion retailer which needs to order multiple products from an apparel manufacturer, which possibly locates in developing countries, for its customers. As this fashion supply chain operates in a decentralized manner, for each product, the fashion retailer will order in a quantity being only sub-optimal compared to the first best solution of the solution. Even worse, if the apparel manufacturer's production system is not perfect and there are disruptions (e.g., brought by an unforeseen pandemic in the new normal), the supply is no longer guaranteed. This becomes a big challenge and the occurrence of production disruptions would not only affect the apparel manufacturer, but also the fashion retailer and the customers. This is a typical example of the ripple effect [1]. It is hence urgent and critically important to address the above two issues with appropriate solutions and find a way to achieve coordinated supply chains for the fashion apparel industry to cope with the challenges in the new normal.
In this paper, we explore the above mentioned challenge with the considerations of multi-product fashion supply chains and a commonly seen but under-studied contract called the supply guarantee deposit payment (SGDP) scheme.4 In real world operations, we have witnessed the use of SGDP contract [2] in which the following arrangement is made. To be specific, in the fashion apparel industry, when the fashion retail brand is a very big enterprise (e.g., GAP, Tommy Hilfiger, Uniqlo, etc.), a lot of apparel manufacturers are interested to serve as its suppliers. Then, the fashion retail brand usually adopts the SGDP scheme. Upon our discussion with the industrialists,5 under the SGDP scheme, the apparel manufacturer has to pay a certain lump-sum of “supply guarantee deposit payment” to the fashion retail brand to make sure it is “qualified” as a member of the supply base and will be responsible for a certain order and supply the product on time. If the apparel manufacturer fails to deliver the requested quantity on time (e.g., because of a production disruption), the “supply guarantee deposit payment” will be taken by the fashion retailer. If the apparel manufacturer can fulfill the order, the deposit will be returned to the apparel manufacturer while the fashion retailer can still enjoy the interest rate benefit. For the apparel manufacturer, the SGDP scheme is a way to guarantee that it can enter the “league” to be a member of the supply base of the big fashion retail brand, which is deemed as prestigious and crucial. This is especially prominent for the fashion supply chains involving global giant retail brands, working with smaller scale factories in the developing countries, such as India, China, Mexico and Turkey [2]. In return, the apparel manufacturer will request the fashion retailer to commit to a certain quantity (i.e. MOQ), which is also a critical contract parameter [3]. Note that due to its simple structure and flexible features, the MOQ contract is ubiquitous in industries, particularly with business-to business firms and a majority of manufacturers prefer an MOQ contract over wholesale price, buyback and revenue sharing contracts [4].
Facing the probable occurrence of pandemic like COVID-19 in the new normal, serious production disruptions become likely and very critical. Motivated by the importance of addressing production disruption problems such as pandemic in the fashion supply chain and the popularity of the SGDP contract in practice, in this paper, we build a stylized newsvendor problem based fashion supply chain model to explore the following research questions:
- 1.
Will the SGDP scheme help the fashion supply chain, in the presence of production disruption? How to set the required amount of deposit payment to achieve win-win channel coordination under the SGDP contract?
- 2.
What is the value of supply chain coordination under SGDP from the perspectives of the supply chain, retailer and manufacturer? What are the critical influence factors in fashion supply chains?
- 3.
How robust are the findings when extending the analysis to the multi-product fashion supply chain case? Can the win-win channel coordination for the fashion supply chain be achieved with different products using SGDP?
- 4.
What is the role played by the minimum ordering quantity (MOQ)? Is it a critical factor for the achievement of channel coordination under SGDP?
By addressing the aforementioned important research questions, we first study the case with a single product and then extend the analysis to the multi-product fashion supply chain case. We show that the SGDP scheme can achieve win-win channel coordination for the fashion supply chain in the presence of production disruption, and we analytically derive the respective bounds for the required amount of deposit payment. We find that the bounds on the channel coordinating deposit payment are decreasing in the chance of production disruption. For the range for setting the channel coordinating deposit payment under SGDP, depending on the size of the quantity difference after the adoption of SGDP, it 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 supply chain, retailer and manufacturer, respectively. We also investigate the critical influence factors in fashion supply chains. 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. Managerial implications are discussed. Furthermore, we explore the role played by the MOQ. We show that the MOQ is critical in order to achieve channel coordination, no matter whether the fashion retailer is risk neutral or risk averse. Finally, we check the robustness of our main results by taking the degree of damage of disruption into consideration.
The organization of the rest of this paper is stated in the following. First, we report a concise literature review in Section 2. Then, we construct the basic model and introduce the SGDP scheme in Section 3 for the single product fashion supply chain. We study the win-win channel coordination challenge, impacts of production disruption and the value of supply chain coordination in Section 4. We generalize the analysis to the multi-product case in Section 5. We conduct further analysis on the role played by MOQ in the SGDP scheme. We conclude in Section 7 with discussions on future studies. All proofs are placed in Online Supplementary Appendix (A1).
Section snippets
Literature review
This paper is related to three streams of research. We review them one by one as follows.
Basic model: single product scenario
To develop our fashion supply chain model, we first consider the situation when there is only one product. We will extend it to the multi-product case later.
Win-Win channel coordination
We now explore the performance of the SGDP scheme. As we explored above, under the SGDP scheme, the contract parameters include the deposit payment D as well as an MOQ. Here comes the definition of win-win channel coordination. Definition 4.1 The win-win channel coordination is achieved in the fashion supply chain if: (i) the fashion supply chain's expected profit is maximized. (ii) Both the fashion retailer and the apparel manufacturer are better off in terms of expected profit compared to before (when they
Multi-product supply chains
Now, we consider the situation when there are n products. For product k, similar to the notation we employed in the basic model, we simply add a subscript k to denote product k. As in this paper, the production disruption refers to the occurrence of some very big production problem (e.g., there is a fire accident, etc.), we take the chance of production disruption in the multi-product case the same as the one in the single-product case. We also consider the situation that the market interest
Value of MOQ under SGDP
Now, we want to explore whether it is possible to coordinate the fashion supply chain by using the SGDP scheme without the imposition of MOQ.
As a matter of fact, the presence of MOQ helps to coordinate the fashion supply chain and protect the apparel manufacturer's profit. With the properly set SGDP scheme, a win-win coordination situation can be achieved, in both the single-product and multi-product cases. However, can the SGDP minus MOQ scheme, denoted as thescheme, be set in a way to
Concluding remarks
In this paper, we have explored the commonly seen SGDP scheme in a newsvendor model based fashion supply chain in the presence of production disruption. Both the single-product and multi-product cases are examined.
Managerial implications
We have identified the following important insights:
Win-win channel coordination: In the presence of production disruption (e.g., created by another pandemic like COVID-19), we have analytically proven that the SGDP scheme can achieve win-win channel coordination in which not only the
CRediT authorship contribution statement
Tsan-Ming Choi: Writing – original draft, Formal analysis, Supervision, Conceptualization, Project administration, Writing – review & editing. Xiutian Shi: Methodology, Formal analysis, Validation, Writing – original draft.
Acknowlegement
The authors would like to thank the editors and reviewers for their insightful, critical, and constructive comments on this article, especially during the time with COVID-19 virus. Tsan-Ming Choi’s research was supported by Yushan Fellow Program (NTU-110VV012). Xiutian Shi's research was supported by the National Natural Science Foundation of China under Grant 72071113.
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