A fast fashion system combines quick response production capabilities with enhanced product design capabilities to both design "hot" products that capture the latest consumer trends and exploit ...minimal production lead times to match supply with uncertain demand. We develop a model of such a system and compare its performance to three alternative systems: quick-response-only systems, enhanced-design-only systems, and traditional systems (which lack both enhanced design and quick response capabilities). In particular, we focus on the impact of each of the four systems on "strategic" or forward-looking consumer purchasing behavior, i.e., the intentional delay in purchasing an item at the full price to obtain it during an end-of-season clearance. We find that enhanced design helps to mitigate strategic behavior by offering consumers a product they value more, making them less willing to risk waiting for a clearance sale and possibly experiencing a stockout. Quick response mitigates strategic behavior through a different mechanism: by better matching supply to demand, it reduces the chance of a clearance sale. Most importantly, we find that although it is possible for quick response and enhanced design to be either complements or substitutes, the complementarity effect tends to dominate. Hence, when both quick response and enhanced design are combined in a fast fashion system, the firm typically enjoys a greater incremental increase in profit than the sum of the increases resulting from employing either system in isolation. Furthermore, complementarity is strongest when customers are very strategic. We conclude that fast fashion systems can be of significant value, particularly when consumers exhibit strategic behavior.
This paper was accepted by Yossi Aviv, operations management.
We analyze the competitive capacity investment timing decisions of both established firms and start-ups entering new markets, which have a high degree of demand uncertainty. Firms may invest in ...capacity early (when uncertainty is high) or late (when uncertainty has been resolved), possibly at different costs. Established firms choose an investment timing and capacity level to maximize expected profits, whereas start-ups make those choices to maximize the probability of survival. When a start-up competes against an established firm, we find that when demand uncertainty is high and costs do not decline too severely over time, the start-up takes a leadership role and invests first in capacity, whereas the established firm follows; by contrast, when two established firms compete in an otherwise identical game, both firms invest late. We conclude that the threat of firm failure significantly impacts the dynamics of competition involving start-ups.
This paper was accepted by Yossi Aviv, operations management.
We consider a retailer that sells a product with uncertain demand over a finite selling season. The retailer sets an initial stocking quantity and, at some predetermined point in the season, ...optimally marks down remaining inventory. We modify this classic setting by introducing three types of consumers: myopic consumers, who always purchase at the initial full price; bargain-hunting consumers, who purchase only if the discounted price is sufficiently low; and strategic consumers, who strategically choose when to make their purchase. A strategic consumer chooses between a purchase at the initial full price and a later purchase at an uncertain markdown price. In equilibrium, strategic consumers and the retailer make optimal decisions given their rational expectations regarding future prices, availability of inventory, and the behavior of other consumers. We find that the retailer stocks less, takes smaller price discounts, and earns lower profit if strategic consumers are present than if there are no strategic consumers. We find that a retailer should generally avoid committing to a price path over the season (assuming such commitment is feasible)—committing to a markdown price (or to not mark down at all) is often too costly (inventory may remain unsold) even in the presence of strategic consumers; the better approach is to be cautious with the initial quantity and then mark down optimally. Furthermore, we discuss the value of quick response (the ability to procure additional inventory after obtaining updated demand information, albeit at a higher unit cost than the initial order). We find that the value of quick response to a retailer is generally much greater in the presence of strategic consumers than without them: on average 67% more valuable and as much as 558% more valuable in our sample. In other words, although it is well established in the literature that quick response provides value by allowing better matching of supply with demand, it provides more value, often substantially more value, by allowing a retailer to control the negative consequences of strategic consumer behavior.
The density, size, and location of stores in a retailer's network influences both the retailer's and the consumers' costs. With stores few and far between, consumers must travel a long distance to ...shop, whereas shopping trips are shorter with a dense network of stores. The layout of the retail supply chain is of interest to retailers who have emission reduction targets and urban planners concerned with sprawl. Are small local shops preferred over large, "big-box" retailers? A model of the retail supply chain is presented that includes operating costs (such as fuel and rent for floor space) as well as a cost for environmental externalities associated with carbon emissions. A focus on exclusively minimizing operating costs may substantially increase emissions (by 67% in one scenario) relative to the minimum level of emissions. A price on carbon is an ineffective mechanism for reducing emissions. The most attractive option is to improve consumer fuel efficiency-doubling the fuel efficiency of cars reduces long-run emissions by about one-third, whereas an improvement in truck fuel efficiency has a marginal impact on total emissions.
This paper was accepted by Yossi Aviv, operations management.
What is the relationship between inventory and sales? Clearly, inventory could increase sales: expanding inventory creates more choice (options, colors, etc.) and might signal a popular/desirable ...product. Or, inventory might encourage a consumer to continue her search (e.g., on the theory that she can return if nothing better is found), thereby decreasing sales (a scarcity effect). We seek to identify these effects in U.S. automobile sales. Our primary research challenge is the endogenous relationship between inventory and sales—e.g., dealers influence their inventory in anticipation of demand. Hence, our estimation strategy relies on weather shocks at upstream production facilities to create exogenous variation in downstream dealership inventory. We find that the impact of adding a vehicle of a particular model to a dealer’s lot depends on which cars the dealer already has. If the added vehicle expands the available set of submodels (e.g., adding a four-door among a set that is exclusively two-door), then sales increase. But if the added vehicle is of the same submodel as an existing vehicle, then sales actually decrease. Hence, expanding variety across submodels should be the first priority when adding inventory—adding inventory within a submodel is actually detrimental. In fact, given how vehicles were allocated to dealerships in practice, we find that adding inventory actually lowered sales. However, our data indicate that there could be a substantial benefit from the implementation of a “maximize variety, minimize duplication” allocation strategy: sales increase by 4.4% without changing the total number of vehicles at each dealership.
This paper was accepted by Vishal Gaur, operations management.
It has been shown that a monopolist can use advance selling to increase profits. This paper documents that this may not hold when a firm faces competition. With advance selling a firm offers its ...service in an advance period, before consumers know their valuations for the firms’ services, or later on in a spot period, when consumers know their valuations. We identify two ways in which competition limits the effectiveness of advance selling. First, while a monopolist can sell to consumers with homogeneous preferences at a high price, this homogeneity intensifies price competition, which lowers profits. However, the firms may nevertheless find themselves in an equilibrium with advance selling. In this sense, advance selling is better described as a competitive necessity rather than as an advantageous tool to raise profits. Second, competition in the spot period is likely to lower spot period prices, thereby forcing firms to lower advance period prices, which is also not favorable to profits. Rational firms anticipate this and curtail or eliminate the use of advance selling. Thus, even though a monopolist fully exploits the practice of advance selling, rational firms facing competition either mitigate it or avoid it completely.
The online appendix is available at
https://doi.org/10.1287/mksc.2016.1006
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It is common for a retailer to sell products from competing manufacturers. How then should the firms manage their contract negotiations? The supply chain coordination literature focuses either on a ...single manufacturer selling to a single retailer or one manufacturer selling to many (possibly competing) retailers. We find that some key conclusions from those market structures do not apply in our setting, where multiple manufacturers sell through a single retailer. We allow the manufacturers to compete for the retailer's business using one of three types of contracts: a wholesale-price contract, a quantity-discount contract, or a two-part tariff. It is well known that the latter two, more sophisticated contracts enable the manufacturer to coordinate the supply chain, thereby maximizing the profits available to the firms. More importantly, they allow the manufacturer to extract rents from the retailer, in theory allowing the manufacturer to leave the retailer with only her reservation profit. However, we show that in our market structure these two sophisticated contracts force the manufacturers to compete more aggressively relative to when they only offer wholesale-price contracts, and this may leave them worse off and the retailer substantially better off. In other words, although in a serial supply chain a retailer may have just cause to fear quantity discounts and two-part tariffs, a retailer may actually prefer those contracts when offered by competing manufacturers. We conclude that the properties a contractual form exhibits in a one-manufacturer supply chain may not carry over to the realistic setting in which multiple manufacturers must compete to sell their goods through the same retailer.
While every firm in a supply chain bears supply risk (the cost of insufficient supply), some firms may, even with wholesale price contracts, completely avoid inventory risk (the cost of unsold ...inventory). With a push contract there is a single wholesale price and the retailer, by ordering his entire supply before the selling season, bears all of the supply chain's inventory risk. A pull contract also has a single wholesale price, but the supplier bears the supply chain's inventory risk because only the supplier holds inventory while the retailer replenishes as needed during the season. (Examples include Vendor Managed Inventory with consignment and drop shipping.) An advance-purchase discount has two wholesale prices: a discounted price for inventory purchased before the season, and a regular price for replenishments during the selling season. Advance-purchase discounts allow for intermediate allocations of inventory risk: The retailer bears the risk on inventory ordered before the season while the supplier bears the risk on any production in excess of that amount. This research studies how the allocation of inventory risk (via these three types of wholesale price contracts) impacts supply chain efficiency (the ratio of the supply chain's profit to its maximum profit). It is found that the efficiency of a single wholesale price contract is considerably higher than previously thought as long as firms consider both push and pull contracts. In other words, the literature has exaggerated the value of implementing coordinating contracts (i.e., contracts that achieve 100% efficiency, such as buy-backs or revenue sharing) because coordinating contracts are compared against an inappropriate benchmark (often just a push contract). Furthermore, if firms also consider advance-purchase discounts, which are also simple to administer, then the coordination of the supply chain and the arbitrary allocation of its profit is possible. Several limitations of advance-purchase discounts are discussed.
We study the following question: How does competition influence the inventory holdings of General Motors' dealerships operating in isolated U.S. markets? We wish to disentangle two mechanisms by ...which local competition influences a dealer's inventory: (1) the entry or exit of a competitor can change a retailer's demand (a sales effect); and (2) the entry or exit of a competitor can change the amount of buffer stock a retailer holds, which influences the probability that a consumer finds a desired product in stock (a service-level effect). Theory is clear on the sales effect—an increase in sales leads to an increase in inventory (albeit a less than proportional increase). However, theoretical models of inventory competition are ambiguous on the expected sign of the service-level effect. Via a Web crawler, we obtained data on inventory and sales for more than 200 dealerships over a six-month period. Using cross-sectional variation, we estimated the effect of the number and type of local competitors on inventory holdings. We used several instrumental variables to control for the endogeneity of market entry decisions. Our results suggest that the service-level effect is strong, nonlinear, and positive. Hence, we observe that dealers carry more inventory (controlling for sales) when they face additional competition.
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