Quick response in fashion supply chains with retailers having boundedly rational managers

Abstract

In fashion retailing, inventory decisions are usually made by a human manager who is not necessarily perfectly rational. In this situation, the inventory decisions made may not always be optimal. At the same time, with advances in technology, fashion retailers have access to the latest market information and can implement the quick response (QR) system that is very helpful to systematically deal with market disruptions. In this paper, we explore the value of QR with the consideration of a boundedly rational human manager in the fashion retailing company. We show that for both cases, with and without QR, the human retail manager's level of bounded rationality significantly hurts the expected profits of the retailer and supply chain, but it does not hurt the manufacturer's expected profit. In addition, for both cases, with and without QR, we indicate how a minimum ordering quantity (MOQ) measure can be imposed by the manufacturer on the retailer, so that the manufacturer can benefit (in terms of expected profit) from the retailer's bounded rationality behavior. We further prove that if the manufacturer sets the MOQ to be the same as the retailer's theoretical optimal ordering quantity, the manufacturer will enjoy a higher profit with 50% chance, if the retailer is boundedly rational.

Quick Response in Supply Chains with Stochastically Risk Sensitive Retailers*

“…Notice that Equations (6) and (7) are rather standard and are also similar to the ones derived in the literature (e.g., Iyer & Bergen, 1997;Choi, 2017).…”

“…i Notice thatChoi (2017) considers a normally distributed ordering quantity by the boundedly rational "risk-neutral" newsvendor and hence the results are very different from this article which considers different risk preferences.…”

“…Tang, Rajaram, Alptekinoğlu, and Ou () examined the benefits of advanced booking discounts in retail supply chain operations. More recent studies on quick response supply chain management include the following: an exploration of the role played by quick response in the fast fashion supply chain (Cachon & Swinney, ), an analysis of the quick response program under competition (Lin and Parlaktürk, ), a study on applying quick response in supply chain systems facing forward‐looking consumers (Yang, Qi, & Li, ), an analysis of the quick response supply chain with a risk‐averse retailer (Choi, ), and an investigation of bounded rationality behaviors of human managers in the quick response supply chain (Choi, ). Similar to the above reviewed works, this article studies quick response in the supply chain context.…”

Editorial to the Special Issue on Optimization of Industrial Systems with Market Disruptions

“…Quick‐response strategy has been shown to effectively deal with market disruptions in the context of fashion supply chain management (Cachon and Swinney, ). In this special issue, Choi () studies a quick‐response fashion supply chain with bounded‐rational retail managers who do not make optimal inventory decisions all the time. The author shows that with or without quick response, the bounded‐rationality behavior of the retail manager significantly lowers the profit of the fashion retailer and that of the whole supply chain, but it does not lower the profit of the manufacturer.…”

“…Market disruptions pose substantial challenges to virtually all business operations. We are now in the information era, filled with advanced technologies and all kinds of data (Choi et al, ). Recent advances in operational research (OR) and business analytic techniques have substantially improved the efficiency and effectiveness of industrial systems.…”