Markdown money policies in textiles and clothing supply chains : a multi-methodological study

Abstract

Markdown Money Policy (MMP) is commonly adopted in the textiles and clothing (TC) supply chain when the supplier trades with his buyer. Under MMP, the downstream retail buyer pays a wholesale price to the upstream supplier in acquiring product supply and will receive a certain amount of "monetary sponsor" from the supplier for the needed inventory markdown at the end of the selling season. In this thesis, a multi-methodological approach is adopted to study the adoption of MMP in TC supply chains. More specifically, empirical case studies, mathematical modeling, and behavioral experimental explorations are all employed with different purposes: The case studies help us gain a clearer picture about the current practices of MMP adoption in the TC industry. After obtaining the inspiration and motivation from case studies, both analytical modeling research and behavioral experiments are conducted to further investigate different important aspects of MMPs. Two TC companies which are implementing MMP, one from the U.S.A. and one from China, are selected as the case study targets. Via semi-structured interviews and discussions with staff members of the companies, it is found that the cultural factors, such as power distance and collectivism/individualism, have strong influence on contract selection and supplier-retailer relationship in implementing MMP. In addition, the results of case studies show that the TC supplier now is more risk-averse than before and the TC buyer tends to have the self-serving fairness concern in their decision making process. Inspired by the case studies, a theoretical analysis on MMP in a TC supply chain with a risk-averse supplier is analytically examined. Formulating the problem as a Stackelberg game in which the supplier is the leader, the analytical closed-form conditions for achieving channel coordination via MMP are derived. In addition, with real industrial data collected from two companies, extensive numerical analysis is conducted to examine the performance of the optimal MMP proposed. Important insights, including the significance of profit's coefficient of variation as a performance indicator in the supply chain, are developed. Managerial implications are discussed. Finally, as revealed by the case studies that retail buyers possess self-serving fairness concerns on supply chain performance, a controlled laboratory experiment is conducted. In the experiment, each buyer's self-serving fairness concern is measured by a parameter called the minimum profit share ratio (MPSR), which is defined as the ratio of the buyer's profit to the whole supply chain profit. To be specific, a two-echelon supply chain is considered, in which a supplier offers a take-it-or-leave-it MMP to a buyer who has an MPSR concern. In laboratory experiments, the role of the supplier is played by human subjects who are practitioners in the TC industry. To ensure that the MPSR concept is fully implemented, the role of the buyer is played by the computer. Mirroring the observed industrial practice, the markdown price is defined as a fixed percentage of the wholesale price, and the supplier needs to decide on the value of wholesale price. The empirical results show that the average wholesale price decreases as the MPSR increases. Moreover, when the MPSR increases, the supplier's average profit decreases, whereas that of the buyer increases. As for the whole supply chain, our experiments suggest there is an inverse U-shaped relationship between the supply chain profit and the MPSR; thus the presence of an MPSR concern leads to a higher supply chain risk in profit uncertainty. The empirical result implies that when the buyer tends to split the supply chain profit equally with the supplier (MPSR=0.5; in this case, neither party faces disadvantageous inequality), the whole supply chain achieves the best performance, and the supply chain profit is close to the theoretically optimal one (the centralized supply chain profit). In other words, a fair buyer helps to create a sense of cooperation between the supplier and herself.