Efficient supply contracts for fashion goods with forecast updating and two production modes

We examine the problem of developing supply contracts that encourage proper coordination of forecast information and production decisions between a manufacturer and distributor of high fashion, seasonal products operating in a two-mode production environment. The first production mode is relatively cheap but requires a long lead time while the second is expensive but offers quick turnaround. We focus on contracts of the form (w(1), W-2, b) where w(i) is the wholesale price offered for production mode i and b is a return price offered for items left over at the end of the season. We find that such a contract can coordinate the manufacturer and distributor to act in the best interest of the channel. The pricing conditions needed to ensure an efficient solution vary depending on the degree of demand forecast improvement between periods and the manufacturer's access to forecast information. We also examine whether these conditions ensure a Pareto optimal solution with respect to two traditional production settings.