Made-in effect and outsourcing strategies in the fashion industry

Abstract

The made-in effect stands as a pivotal factor in shaping sourcing strategies. This phenomenon revolves around how a product's country of origin influences consumer perceptions, brand reputation, and pricing dynamics. The made-in effect is particularly relevant within the fashion industry, where outsourcing became the industry standard. With the rise of fast fashion and ultra-fast fashion market segments, the focus increasingly shifts to where and under what conditions products are made, and how well sustainability considerations are upheld. In this study, we examine the sourcing decision of a fashion company within the framework of an inventory management model, assuming that in addition to the sales price, the location of manufacturing also affects product demand (made-in effect). The decision problem we formulate thus takes into account both demand and cost considerations when analysing outsourcing decisions. Key findings highlight that if the firms possess the autonomy to set prices, it is more likely to source within the country or the nearby region. Conversely, if the firm is a price-taker, it may be optimal to involve more distant, cost-effective regions in production and a dual-sourcing strategy from both regions may prove optimal. These insights are in line with industry practices: in luxury markets, where firms dictate prices, products are primarily sourced from domestic or nearby regions, whereas in fast fashion markets, where pricing is market-driven, cost optimization necessitates heavier reliance on Asian facilities. Consequently, this has precipitated the decline of mass-market garment production in developed countries, and only the small batch production of premium products could survive. As a result, there will be less alternatives to procurement from the Far East in the lower market segments, which further reduces the industry's resilience.