Sales Rebate Contracts in Fashion Supply Chains

Abstract

We explore in this paper the performance of sales rebate contracts in fashion supply chains. We conduct both analytical and numerical analyses via a mean-variance framework with reference to real empirical data. To be specific, we evaluate the expected profits and variance of profits (risk) of the fashion supply chains, fashion retailers, and manufacturers under (1) the currently implemented sales rebate practices, (2) the case without sales rebate, and (3) the theoretical coordination situation (if target sales rebate is adopted). In addition, we analyze how sales effort affects the performances of the supply chain and its agents. Our analysis indicates that the rebate contracts may hurt the retailer and the manufacturer of a fashion supply chain when it is inappropriately set. Moreover, a properly designed sales rebate contract not only can coordinate the supply chain (with retail sales effort) but can also improve expected profits and lower the levels of risk for both the manufacturer and the retailer.