High demand uncertainty, Corporate Finance

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Fashion products in general are characterized by high demand uncertainty, high stockout costs and a high risk of obsolescence (Lee, 2002). Although the speci?c mail order company that we study can be classi?ed as an apparel company rather than a fashion company, it shares these characteristics. This is evidenced by the fact that the company frequently has signi?cant leftovers of individual SKUs which cannot be carried over to the next season and need to be sold at high markdowns. Customer satisfaction and retention are crucial in the mail order business, and the company can therefore not afford to run out of stock on many SKUs, as that would turn away customers. Therefore, we review the literature on apparel as well as fashion companies, and more generally on single period/single season products.Raman (1999) ?nds that few fashion companies are aware of, let alone use, the mathematical models for fashion planning that have been proposed in the literature. He notes thatmost papers fail to demonstrate the proposed models using applications and to provide thorough evidence of their ability to in?uence managerial decisions. Other important shortcomings are that most proposed methods rely on demand data gathered using the selling season (a posteriori forecasting), and do not consider expert judgment.

In the remainder of this section, we ?rst mention some papers that do not deal with forecasting but related management problems, then shortly discuss a posteriori forecasting, and ?nally discuss the a priori methods in detail as they are the most relevant for our study.


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