Product variety arising from hedging in the fashion supply chains

Vaagen, Hajnalka and Wallace, Stein W (2008) Product variety arising from hedging in the fashion supply chains. International Journal of Production Economics, 114 (2). pp. 431-455. ISSN 0925-5273

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Consider a well-defined fashion apparel category, where the variants are distinguished by style and colour, and are subject to two equally likely states of the world: State1 when some variants become popular and others unpopular, and State2 when the reverse takes place. We analyse the optimal portfolio and variety arising from hedging against uncertainty triggered by the states, by integrating the Markowitz and the Newsboy models, while carefully considering demand correlations. We show that due to the complex structure of the uncertainty, building hedging portfolios with competing items is necessary for optimality. We also show how mis-specifying the distributions can lead to very bad trade-offs between risk and expected profit, caused by a lack of proper hedging.

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Journal Article
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International Journal of Production Economics
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11 Jul 2011 18:31
Last Modified:
21 Nov 2022 21:24