Fulfillment lead time and capacity decisions under demand chasing

Abstract For fashion products that have rather uncertain consumer demands, retailers can use the demand-chasing tactic to mitigate the uncertainty. Specifically, the demand-chasing retailer can place small, initial orders to identify which products are popular and then press suppliers to deliver expedited reorders. Moreover, the retailer can reduce the required lead time, and the supplier can either ramp up capacity levels to fulfill the reorders in a timely manner or face hefty penalties. However, the supplier prefers receiving firm order commitments as far in advance as possible for better capacity planning. This conflict of interest regarding capacity levels creates tension, especially if the supplier and retailer have unequal channel powers. The goal of this research is to provide a better understanding of the required lead time and how it affects capacity decisions in a decentralized supply chain. We use game-theoretic models to show the implications of required lead time and channel power on capacity decisions. In addition, we propose contract mechanisms that can coordinate the supply chain and optimize capacity levels.