Tuesday, November 13, 2012

Supply Chain Networks with Global Outsourcing and Quick-Response Production -- Operations Research and Fast Fashion

Last Sunday's New York Times magazine had a terrific article by Suzy Hansen, "How Zara Grew Into the World's Largest Fashion Retailer,"  which I very much enjoyed reading. I do admit that,  when I live in Gothenburg, Sweden, I enjoy visiting the Zara, H&M, and TopShop stores there since I conduct research on a variety of network systems, including supply chain networks.  Along with my former doctoral student, who is now an Assistant Professor, Min Yu,  we have published two papers on what is known as fast fashion.

The first paper on the topic that we wrote is: Fashion Supply Chain Management Through Cost and Time Minimization from a Network Perspective, Anna Nagurney and Min Yu, in Fashion Supply Chain Management: Industry and Business Analysis (2011), T.M. Choi, Editor, IGI Global, Hershey, PA, pp 1-20.

The second is: Sustainable Fashion Supply Chain Management Under Oligopolistic Competition and Brand Differentiation, Anna Nagurney and Min Yu, International Journal of Production Economics, Special Section on Green Manufacturing and Distribution in the Fashion and Apparel Industries 135: (2012) pp 532-540.

In The New York Times article,  Hansen writes about the company Inditex, which owns the Zara brand and series of stores. She writes:  More than half of Inditex’s manufacturing takes place either in the factories it owns or within proximity to company headquarters, which is to say in Europe or Northern Africa. Inditex owns factories in Spain and outsources production to factories in Portugal, Morocco and Turkey — considered costly labor markets, typically. The rest of its clothes are produced in China, Bangladesh, Vietnam and Brazil, among other countries. The trendiest items are made closest to home, however, so that the production process, from start to finish, takes only two to three weeks. Inditex’s higher labor costs are offset by greater flexibility — no extra inventory lying around — and on faster turnaround speed. 

The article also has some very nice quotes from Professor Fraiman of Columbia University that got me excited because of the language and terminology. Fraiman, in commenting on Inditex's  ideas on expanding in China stated that: “Their factories in La Coruña have a finite capacity to respond quickly. You open more and more stores, and you don’t have flexibility of the last-minute response. Once they have a big thrust in China, then what happens is that they will have to take the whole model” — the processing of customer reactions, the quick-turnaround design teams, the logistics platform — “and replicate it in China.” But the bigger Inditex gets, he says, the more it will lose control over quality and efficiency. 

In a recent paper of ours, Supply Chain Networks with Global Outsourcing and Quick-Response Production Under Demand and Cost Uncertainty, Zugang Liu and Anna Nagurney, which is in press in a special issue of the Annals of Operations Research, we use Zara, as well as toy production, as some of the motivating examples. The paper is also interesting from a methodological perspective since we integrate stochastic programming, game theory, and variational inequality theory, as well as real options from finance.

Specifically, in our paper, which my co-author presented at the INFORMS conference in Phoenix and will also be presenting at the DSI conference in San Francisco next week, we developed a modeling and computational framework for supply chain networks with global outsourcing and quick-response production under demand and cost uncertainty. The  model considers multiple off-shore suppliers, multiple manufacturers, and multiple demand markets. Using variational inequality theory, we were able to formulate the governing equilibrium conditions of the competing decision-makers (the manufacturers) who are faced with two-stage stochastic programming problems but who also have to cooperate with the other decision makers (the off-shore suppliers). Our theoretical and analytical results shed light on the value of outsourcing from novel real option perspectives. In addition, our simulation studies reveal important managerial insights regarding how demand and cost uncertainty affects the profits, the risks, as well as the global outsourcing and quick-production decisions of supply chain firms under competition.

 The paper will appear in a special issue dedicated to the memory of Professor Cyrus Derman, who passed away last April at age 85. According to Columbia University, Professor Emeritus Cyrus Derman, was considered the driving force behind the success of Columbia Engineering's Department of Industrial Engineering and Operations Research (IEOR). He had also served as the doctoral dissertation advisor of well-known colleagues in Operations Research, including Professor Michael Katehakis, one of the co-editors of the special memorial volume, Peter Kolesar, and Art Veinott, Jr.

The theme of the special issue is
Optimization under Uncertainty Costs, Risks and Revenues.