Tug of War Between Supplier and Retailer : Capacity Decisions Under Demand Chasing

Retailers of fashion products constantly face the risk of missing demand in the selling season. To reduce the risk, the retailer can choose to place small initial orders to identify popular products and subsequently press the supplier to deliver expedited reorders -- the so-called emph {demand chasing tactic}. However, the supplier prefers receiving firm order commitment as far in advance as possible to better adjust its capacity level. This conflict of interests regarding capacity level can build tension between the supplier and the retailer, which is more so for the entities experiencing channel power imbalance in a decentralized supply chain. In view of this tension observed in practice, we model the demand chasing tactic to reveal its effects on the profitability of the individual entities and of the supply chain as a whole. As we consider the channel power imbalance in the supply chain, we use standard Stackelberg games to analyze the strategic decisions of the entities. We show that the demand chasing tactic tends to cause capacity overage or underage as compared to the optimal capacity level in the centralized supply chain. Moreover, unless the product profit margin is exceptionally high, obsessively pressing the demand chasing tactic would harm rather than improve the expected profit of the entities, including the retailer itself