Modeling the role of made-in effect in the fashion industry

Abstract Our model explores supplier selection within an inventory management framework, integrating regional considerations and the impact of the made-in effect on demand. The firm optimizes product pricing, geographic sourcing distribution, and batch sizes. Our analytical results suggest that firms should expand local sourcing when product origin strongly influences consumer value or when demand is relatively inelastic to price. Additionally, leveraging smaller batch production can optimize cost efficiency while maintaining responsiveness, making local sourcing a strategic advantage in markets with uncertain demand or high service levels. In the fashion industry, the made-in effect plays a crucial role in shaping sourcing strategies, as a product’s country of origin significantly impacts consumer perceptions, brand reputation, and pricing dynamics. In line with observed sourcing strategies, we show that in the luxury segment, known for its significant pricing power and high service level, brands benefit from outsourcing manufacturing domestically. In contrast, economy brands, which operate under tighter margins and serve highly price-sensitive markets, should rely on offshore sourcing, leading to larger safety stocks and reduced responsiveness to demand uncertainty. Finally, a dual sourcing strategy—combining local and offshore suppliers—may be optimal, allowing firms to balance cost efficiency with responsiveness. This approach is commonly adopted by fast fashion companies to manage short product life cycles and volatile demand.