An Optimization Model for Apparel Supply Contract with Option

Abstract

With the dynamic changes of apparel fashion trends, it's becoming difficult to match demand using traditional inventory control models, without stock out or opportunity loss. To treat this problem, supply contract models were proposed in past one decade, arguing that it performs better compared to newsvendor in all condition. However, we found that in some conditions, the supply contract model with options unnecessarily perform better compare to traditional newsvendor model. This provides us an indication that when we introduce new business model, all the possible condition should be considered rather than considering average performance only. In this research, we compared the newsvendor model with our model, generating one by one demand distribution along with the possible parameter settings, and then examined the period of parameters that the option model can provide better performance. Furthermore, we found that the inferior performance is caused by the expense of purchasing options. Finally, we learned the important factors that play a major role in decision-making with the option model for fashion products.