Tailored capacity: Speculative and reactive fabrication of fashion goods

Consider a fashion goods retailer choosing a strategy for contracting production of its products. It can (1) speculate by contracting for a certain quantity to be produced well ahead of uncertain demand at relatively low unit cost, (2) react by waiting until demand is known, and only then contracting for just the right quantity at a higher unit cost, or (3) hedge its bets by speculating on a portion of the total quantity, and reacting to demand for the rest. Using a two-product two-stage model, we identify the conditions under which each strategy is preferred, and determine capacity requirements. We find that fashion retailing often benefits from the dual strategy due to relatively higher obsolescence costs. But the use of the dual strategy is sensitive to the cost premium for reactive capacity and to the makeup of reactive production costs as either largely variable or fixed. (C) 2008 Elsevier B.V. All rights reserved.