Contract Design and Supply Chain Management in The Luxury Jewellery Industry

International Journal of Retail & Distribution Management
Contract design and supply chain management in the luxury jewellery industry
Alessandro Brun Antonella Moretto
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Contract design
Contract design and supply chain and SCM
management in the luxury
jewellery industry
607
Alessandro Brun and Antonella Moretto
Department of Management, Economics, and Industrial Engineering, Received 14 July 2011
Politecnico Di Milano, Milan, Italy Revised 18 December 2011
Accepted 21 February 2012
Abstract
Purpose The purpose of this paper is to identify the role of contract design in overcoming critical
demand management (DM) issues in the luxury jewellery industry. The goals are the identification of
the main critical issues of the DM process and the analysis of the contribution of contract re-design to
solve them.
Design/methodology/approach The paper follows an exploratory approach using a case-based
methodology. Data are collected through a sample composed of four brand-owning companies and 37
multi-brand retailers in the luxury jewellery industry.
Findings The paper offers insights into contract design in the luxury jewellery industry. In
particular, the critical issues of the DM process determined by inadequate contract design are
identified, thus highlighting their influence on the critical success factors of luxury companies. In
addition to the characteristics the contract should have to overcome the critical issues have been
proposed.
Research limitations/implications The research provides initial insights into the important role
of contract management in jewellery luxury companies. To date, the analysis is predominantly
qualitative and not sufficiently statistically significant to generalise the results.
Practical implications This paper raises a number of important issues for jewellery brand
owners who are reluctant to consider the retailers perspective in a collaborative way during the DM
process.
Originality/value This paper is one of the first attempts to study contract design specifically
applied to jewellery luxury companies, with a main focus on the DM process.
Keywords Jewellery luxury industry, Jewellery, Demand management process, Demand management,
Contract design, Supply chain management
Paper type Research paper
1. Introduction
In the area of supply chain management (SCM), several authors have stressed that in
recent years, competition no longer exists among companies, but it does exist among
supply chains (SC) (Christopher, 1992; Rice and Hoppe, 2001). In this new competitive
arena, the challenge is to design mechanisms that could help companies align
competitive objectives, share risks and costs of the collaboration, and share the benefits
resulting from the collaboration (Narayanan and Raman, 2004; Chen, 2011). Several International Journal of Retail
authors (Cachon, 2004; Narayanan and Raman, 2004) suggest that the most suitable & Distribution Management
Vol. 40 No. 8, 2012
tool in accomplishing a collaborative SC is the re-design of SC contracts. pp. 607-628
The demand management (DM) process presents several critical issues related to q Emerald Group Publishing Limited
0959-0552
the current management of the downstream SC by the brand owner (BO). The contract DOI 10.1108/09590551211245416
IJRDM adopted by the BO influences, and sometimes drives, the critical issues, determining
40,8 sub-optimal behaviours. For instance, placing the whole risk of overstock on the
retailer would result in the retailer buying less than the expected demand given that its
margin is lower than the lost income in case of extra-stock (Xiong et al., 2011). This
phenomenon is quite frequent for fashion goods, as well as flowers or newspapers
(Chen, 2011). Similar examples (e.g. Gurnani et al., 2010; Hsieh and Lu, 2010; He and
608 Zhao, 2011) demonstrate the reduction of benefits obtained in the SC, due to the wrong
coordination at the downstream level. According to this consideration, this paper aims
to identify the role of the contract in assuring a win-win coordination along the SC,
especially during the DM process. In order to achieve this overall objective, two more
detailed research questions have been formulated.
RQ1. What are the main critical issues identified for the DM process, because of
contractual constraints?
RQ2. How could the contract reduce the critical issues of the DM process?
However, this redesign should be undertaken considering possible misalignment of the
actors behaviours, which are strongly related to the characteristics of the specific
industry in which the SC competes (Yao et al., 2005).
The luxury industry presents peculiar characteristics, which result in consolidated
SC models that are not always applicable in this context (Caniato et al., 2008b).
Furthermore, in this sector, the competition is fierce, which increases the requirements
for aligning operations along the SC towards the personality of the brand and its
positioning (Moore and Birtwistle, 2004). Despite the importance of collaboration in the
downstream SC for luxury companies (Castelli and Brun, 2010), few studies that
address the luxury industry have been proposed in the SCM literature, especially those
studies that involve contract re-design. Regarding this perspective, it is necessary to
explore the business field and identify the main aspects of a contract that should be
defined according to the competitive priorities of the luxury industry. A specific focus
on luxury jewellery has been maintained, as the jewellery industry is less studied
compared to fashion or other luxury industries.
In order to answer to the above stated research questions, we followed a two-step
research process. We started by interviewing four brand owner companies, in order to
understand the main characteristics of the demand management process in this sector
and highlighting the relevance of the theme under study. This analysis proved the
important role covered by retailers, due to the custom to resort to multi-brand solutions
in the jewellery industry. According to that, the second step of the analysis implied the
development of interviews with 37 multi-brand retailers, thus gaining significant
insight on their perspective over the brand-retailer interactions, thus having the
element required to formulate the proposal of a new contract.
This paper provides interesting findings identifying critical areas of the DM process
and reports how the contract re-design could solve these issues. Moreover, the
influence of these critical issues on the critical success factors (CSFs) of the luxury
industry will be illustrated, thus highlighting the importance to luxury companies of
optimising the operational processes. The paper is organised as follows: in section 2,
the literature background will be reviewed; in section 3, the methodology will be
presented; in sections 4, 5 and 6, the main results and in section 7, conclusions and
future research will be illustrated.
2. Background literature Contract design
2.1 SCM in the luxury industry and SCM
There are many studies on SCM in the literature (e.g. Harland, 1996; Croom et al., 2000),
but SC models generally have little applicability to the luxury sector (e.g. Caniato et al.,
2008b, 2011). In this sector, different approaches of SCM could be highlighted to
illustrate the requirements of the industry. However, SCM could be important for
luxury companies given that SC configuration and management could impact the CSFs 609
of luxury companies, thereby supporting them in achieving a competitive advantage
(Brun et al., 2008). In particular, according to Caniato et al. (2008b), the main CSFs for
luxury companies are high level of quality, heritage of craftsmanship, exclusivity of
products, emotional appeal, brand reputation, style and design recognition, association
with a country of origin famous for excellence, uniqueness, and creation of a lifestyle.
These CSFs could also be considered for jewellery products, according to Jamal and
Goode (2001).
2.2 Demand management

According to the definition of Croxton et al. (2001), DM is the process that seeks to
effectively and efficiently match customers demand and companys supply capacity.
DM is most critical when the product lifecycle is short and the demand is
unpredictable. In these cases, the coordination between the retailer and the BO is
considered to be crucial by many authors (e.g. Christopher and Peck, 1997; Jacobs,
2006). In addition to other topics, the frequency and the size of replenishment are
relevant topics for DM, especially for luxury companies, because these elements should
be correlated with the characteristics of products demand (Caniato et al., 2008a).
In the general SCM literature, several models have been proposed. In some cases, the
model focuses only on forecasting (Mentzer and Moon, 2005), but these models are not
applicable to the luxury industry because when the product lifecycle is short, a quick
response to demand is more effective than forecasting improvements. Other models
consider the whole DM process, such as the Crum and Palmantiers (2003) model and
the model of Croxton et al. (2001) (see Figure 1). The Croxton et al. model distinguishes
between strategic and operational sub-processes with a broad perspective. At the
strategic level, the forecasting approach is selected; at the operational level, the process
team executes the forecasting as it was defined in the previous step.
2.3 SC contract
In the SCM literature, there are several categories of contracts for the coordination of
the actors: some are specialised for R&D activities and some are designed for
constructing and large project execution. A coordination contract could be defined as
a contract that results in decisions by individual parties that maximise the profit of
the entire SC and leave each member of the chain satisfied (Chen et al., 2010). The
contracts are especially required in decentralised SC, where the optimal SC profit
cannot be achieved because of the double marginalisation effect (Spengler, 1950). This
effect refers to the fact that each actors cost structure is influenced by the transfer
price introduced in the SC, thus avoiding the gain of the optimal profit (Chen and Xiao,
2009). The contract has been identified by researchers as important leverage in the
resolution of these conflicts (Hsieh and Lu, 2010).
IJRDM
40,8
610
Figure 1.
The model of the demand
management process
proposed by Croxton et al.
Given the aim of this paper, we concentrated on contract typologies that can be used to
share supply chain risks between two actors, which typically include one producer and
one distributor (Cachon and Lariviere, 2001; Cachon, 2003; Boulay, 2010; Hsieh and Lu,
2010; Zhao et al., 2010). The most acknowledged contract typologies are briefly
described in Figure 2.
Considering the above-mentioned contract types, it is clear that contracts are a
powerful means of coordination. Nevertheless, non-traditional contracts are not very
Contract design
and SCM
611
Figure 2.
Main contract typologies
widespread in SCM practice. This subject is usually approached in a very technical

manner, both from a legal and an analytical point of view. Secondly, very often these
contracts appear too generic in supporting the operational requirements of real
companies, especially if they operate in a very specific industry as luxury. As pointed
out by Gurnani et al. (2010), the contract design should be analysed in terms of the
types of demands faced by the retailer, the timing of pricing decisions, the relationship
among price and demand, etc. All these elements are strongly related to the
characteristics of the industry itself, thereby requiring a specific analysis during
the contract design phase.
3. Methodology
3.1 Research process
In order to answer to our research questions, a two-step research process was followed.
First of all, a case based methodology, with a sample of four brand owners was
used. Information was collected according to an ad hoc classification scheme consisting
of three sections:
IJRDM (1) main challenges of luxury jewellery companies;
40,8 (2) the DM process; and
(3) the main features of the contract used.
These companies allowed us to identify the high relevance of the DM process as well as
its main features within this industry.
612 According to that, we decided to focus our analysis especially on multi-brand
retailers, being the most common retailing solution in the jewellery industry in spite of
the risk of potentially negative impact on several luxury CSFs. Moreover, the
interviews have been conducted with multi-brand retailers with a two-fold objective:
comparing the behaviours of different BOs and analysing the situations in which the
contract is more important to ensure collaboration.

The analysis at the retail level has been performed following the steps described in
Figure 3.
After the literature review and the BOs interviews, a questionnaire was designed to
identify the main critical issues of DM. Data collected through interviews was
catalogued to allow comparisons through a definition of a common scale and the data
reduction. A matrix (with questions asked in rows and the responses of each retailer in
columns) was filled in to identify the behaviour of each brand, reorganising the data
obtained by different retailers in a single table. This approach allowed us to identify
common patterns among different brands and to seek general approaches. Thanks to
this matrix, the main critical issues were identified and were then grouped according to
the main phases of DM process. The researchers performed this step independently,
thus arriving subsequently at a shared final version of the three groups.
Figure 3.
Steps of the research
development process for
multi-brand retailer case
studies
The interviews also allowed the identification of possible solutions to the problems Contract design
related to DM process based on the experience of the retailers and of the resulting and SCM
benefits. These solutions have been reorganized (in the same way we did for critical
issues), with the aim of developing a new contract. The contract was designed starting
from the typical contract formats used inside the industry, then modifying specific
clauses. Concurrently, we analysed the possible benefits of the new contract in terms of
impact on the brand CSFs. Also in this case, the researchers worked independently in 613
the first phase and shared their proposals to obtain a single output subsequently.
The quality of the work is evaluated in terms of trustworthiness (Halldorsson and
Aastrup, 2003):
.
Credibility The data were collected through a direct involvement of people in
the context, asking for their interpretation of the reality. Moreover, the semantics
of ambiguous words were clarified with the participants via follow-up

questioning.
.
Transferability The results could be transferred to similar industries, such as
the fashion or the watch industries. This was achieved through the sample
design, thanks to the involvement of people with different experiential
backgrounds. Moreover, we describe the cases and the context in sufficient detail
so that comparison with existing or future studies can be achieved through the
evaluation of context/sample similarity.
.
Dependability The dependability of the research is achieved thanks to adoption
of a structured research process, as described previously. Moreover, the
soundness of results is ensured thanks to quite a large sample of analysis, due to
the adoption of a case-based methodology.
.
Confirmability Full responses were written up and shared among all the
researchers, thus noting any changes nor modifications to the data. Moreover,
the conclusions of the paper and interpretations were shared with some retailers,
thus obtaining their approval about the correct interpretation of data.
3.2 Sample selection

In general, our focus was the luxury industry, but only jewellery companies were
studied in order to increase the comparability of data. The jewellery industry was
selected instead of the other industries because it presents a strong fashion attitude
(short lifecycle, impulsive purchases, volatility and demand unpredictability), which
influences the DM process (Christopher and Peck, 1997), and it is under-studied in the
academic literature compared with the apparel and textile industries (Caniato et al.,
2008a; Moore and Doyle, 2010).
Given the exploratory nature of the topic, a case-based methodology was selected
(Yin, 1994). Case study research has interpretive advantages even though it is limited
in terms of standardisation and generalisation of findings outside the boundaries of the
empirical research considered (Larsson and Lubatkin, 2001). As regards the sample
size, Mintzberg (1979) states that the point is trying to go into organisations with a
well-defined focus to collect specific kinds of data systematically. In the present work
the identification of DM-critical issues was realised through the analysis of four BOs
and 37 multi-brand retailers. This number can be considered sufficient to give an
accurate account in empirical research (Yin, 1994; Eisenhardt, 1989). For the BOs, all
IJRDM the interviews were carried out face-to-face, conducting at least two in-depth interviews
40,8 per company; for the multi-brand retailers, most of the interviews (27 out of 37) were
conducted in person, whereas the other ten interviews were conducted via telephone
and e-mail correspondence. The triangulation of data was performed thanks to the
analysis of documentation provided by the companies and with direct observation
inside the stores. All the interviews with BOs were conducted in their headquarters
614 (namely, France, Switzerland and Italy), while interviews with the retailers were
conducted directly in shops (all of which are located in Italy).
The focus of the interviews was the relationship between the retailer and the BO.
The BOs have been selected being representative of the jewellery industry in terms
of type of products as well as country of origin (Italy, France, and Switzerland). We
therefore selected two Italian high jewellery brands a French one and a Swiss
watchmaker from the most globally renowned luxury brands. With the multi-brand
companies approximately 40 brands were analysed, considering both Italian and
foreign brands.
Given the deliberate focus on the luxury industry, only brands that are identifiable
as strong niche brands (i.e. brands with a strong brand image, oriented to a narrow
customer segment) or power brands (i.e. brands with a strong image and reputation
and a medium-high market share) were considered. The classification was realised
considering the market share of the company (which should be lower than the market
average for niche brands) and the image of the brand (which for both groups should be
associated with a status quo and with strong values at the international level).
Additionally, all three levels of luxury (see Figure 4) were covered in order to
develop a picture of the whole industry.
Only retailers offering at least one of the 40 high-end brands were selected, yet most
retailers were simultaneously offering several of those brands.
Figure 4.
Classification of the
brands in the sample
3.3 The interview protocol Contract design
The BO interviews were constructed in a semi-structured form; during them it was and SCM
possible to assess fully the relationship with the retailers. The questionnaire includes
open questions about the DM process as well as the contracts used inside the company.
To perform steps 1, 4, and 5 of the multi-brand analysis, a qualitative (e.g. which
tools are used to support the procurement activities) and quantitative (e.g. number of
product lines per brand, number of items per product line) questionnaire was 615
developed. The questionnaire included both open and multiple-choice questions in
order to both obtain the retailers personal perceptions and insights and to increase the
comparability among answers. The questionnaire is composed of four main sections:
.
Section 1: product range offered by the store, product availability and the level of
autonomy of the retailer in determining the product range;
.
Section 2: relationship with the BOs;
. Section 3: service level assured to the customers; and
.
Section 4: characteristics of the points of sales (POS).
4. Main findings from the BOs

The four BOs allowed us to identify the main challenges for jewellery BOs as well as
the main features of the DM process. In particular, the four companies have
demonstrated that jewellery companies do not control the whole supply chain.
However, most of these companies have outsourced the production activities and
adopted indirect channel to sell products. But this business model has highlighted
some limitations, as suggested by the four firms:
.
the lack of control of production activities implies a lower control of the product
quality, a CSF for luxury companies; and
.
the lack of control of retail implies a lower control of the brand image, another
CSF for luxury companies.
These considerations have led companies towards a progressive change in their policy;
phenomena of re-insourcing of the production activities and of stronger focus on the
mono-brands store have been very frequent in the last few years (e.g. Company A). But
in spite of this consideration, a peculiarity of the jewellery industry is that it still
heavily depends on multi-brand retailing, thus requiring a good alignment of
objectives and incentives among BOs and retailers (e.g. Companies B and C). In this
perspective, the four companies have addressed the growing relevance of DM
processes as well as contracts to guarantee this alignment.
The interviews have been functional also to the identification of the main features as
well as pitfalls in the DM process with the multi-brand retailers:
.
Companies A, B, and C require a minimum level of purchasing at the beginning
of the season, capable of guaranteeing a pretty complete collection inside the
store; and
.
none of the companies allow contracts on sale or return basis, which implies
the possibilities for the retailers of not having damages if they do not sell the
products;
IJRDM .
none of the companies accept returned products from the retailers at the end of
40,8 the season; and
.
Companies A, B, and D do not involve the retailer in a formal way during the DM
process.
Arguably, these pitfalls inside the DM process could jeopardise some of the companys
616 CSFs. Due to these critical issues, a specific analysis on the multi-brand retailers was
performed, with the aim of identifying the main problems related to both DM and
contract design.
5. Identification and categorisation of the main critical issues of the DM

The data collected through the interviews with retailers allowed us to identify several
critical issues related to the collaboration among BOs and retailers, confirming the
pitfalls identified through the four BOs. The critical issues that emerged are grouped
into three main areas:
(1) long-term oriented;
(2) forecast oriented; and
(3) operational oriented.
The long-term oriented group concerns the long-term management of the

collaborative relationship between BO and retailer. Three aspects appear to be
particularly relevant:
(1) A different perception of the product range by the BO and the retailer. The BO
desires the maximum display space to increase the probability of impulsive
purchases, and to fix the retailers attention towards his/her products. The
retailer wants to reduce risk, offering a wider range of products (different
products of different brands in different levels of prices), thus increasing the
probability of satisfying a single customer.
(2) Defining and managing the product portfolio. During the definition of the product
range, the BO and retailer must decide the product category to include at the POS.
The retailer wants to select a limited range of product categories, identifying
those that are easier to sell. For example, several retailers have mentioned their
preference for rings. Conversely, the BO wants to present the whole collection
because the incomplete collection is perceived as a lost sale and because he/she is
more interested in selling a whole parure (set of jewellery) rather than a single
piece. Furthermore, during portfolio management, how often the BO can replace
the POS should be defined. The retailers maintain that the contract does not
obligate them to order a minimum number of products, and this could be
perceived as an advantage; however, additional correlated elements, such as the
policy adopted by the BO for unsold products and the communication of sales
forecasts, could impact the retailer choice. These contractual constraints cause the
retailer to maintain an average of only one unit of stock for expensive and
exclusive products (especially if the retailer is solely responsible for unsold
products or overstock) and a maximum of two or three pieces for the more
accessible products, when the loss margin is higher than the eventual cost in case
of a no-sale. This choice is made when the retailer is unaware of promotions or
special sales plans (which could be an important opportunity to sell more Contract design
products for the retailer as well) and is unaware of the BOs decision to not call in and SCM
the unsold products (which should be managed by the retailer alone).
(3) Absence of a performance measurement system (PMS). In most cases, the BO
does not assess the operational performance of the retailer. The retailer
performs a self-assessment, without considering the parameters that are jointly
defined with the BO (e.g. retailers are not interested in analysing their 617
capabilities of satisfying the BOs CSFs).
The second critical area is forecast oriented and is strictly related to the forecast in
DM process. All the causes influencing the forecast errors could be considered in this
area:
.
A lack of information sharing about demand forecasting. In particular, the BO
tends not to consider the information from the retailer, such as the sell out, the
requirements of customers, the perception of the retailers, etc. This problem does
not strictly depend on the contract among the actors, but on the cultural
approaches adopted within some companies. Several retailers have addressed
the issue of non-attention of the BOs tn their perceptions, thus avoiding their
involvement in the process. In addition, no information about the inventory level
is communicated, thus completely dropping this parameter in forecasting future
demand.
.
No clear definition of the roles during forecasting activities. In particular, if the
retailer can develop personal forecast plans, he/she is completely responsible
when forecast errors occur, given that the BO does not call in subsequently
unsold products. In this way, the retailers tend not to develop personal forecast
plans as often as possible or tend to underestimate the final demand.
.
Request of order continuity. Many BOs require order continuity for the retailer
that is not consistent with retailers needs. For example, several retailers
mentioned that the BO requires at least one order per month or a minimum
number of orders per year. Especially for small retailers, the limited dimensions
of both the shop and the customer base do not allow them to guarantee order
continuity during the year. This implies a misalignment between BO and
retailers, thus incentivising the retailers to order less than they need at the
beginning of the season. This behaviour does not produce the optimal level of
benefits from a SC perspective, given that in this way, the probability of an out of
stock situation is higher.
The operational oriented critical area addresses the management of the relationships
among parties with respect to the flow of products. Two main critical issues could be
identified:
(1) Lack of a policy for the management of unsold products and stock management.
Mainly, this critical issue involves the overstock due to the BOs policy of not
including return policies in the contracts. Most of the important brands are
especially interested in new orders and do not consider the problems of lost
sales or old products. For example, few retailers have addressed the issue of
non-attention toward unsold products, which are sold at a discount price during
IJRDM the next season: this trend implies a reduction in income for the retailer, who
40,8 should sell the products at a lower margin, and for the BO, who decreases the
exclusivity of his products. Often, the BO is unaware of this phenomenon and
does not consider the sale of previous products. This critical issue is strongly
related to the contract adopted by the BO and could determine dramatic
consequences from a SC perspective, considering both the financial perspective
618 and the luxury CSFs.
(2) Management of the lead-time variability. This topic is especially critical for
impulsive purchases, as often occurs with jewellery, because the absence of a
product at the POS could determine the loss of a sale. In several cases, the BOs
are more interested in the high quality level of the products, and therefore
neglect the importance of the service level towards their customers. Few
retailers have mentioned the high numbers of sales losses due to the absence of
products that are already presented in magazines and advertising. This
phenomenon has been accentuated in recent years, especially in large cities such
as Milan due to the high level of lost sales with tourist customers, who cannot
return at a later date if a product was not available in the store.
All of the critical issues identified in the three groups could influence the positive
realisation of the DM process. Figure 5 shows the connection among the critical issues
mentioned above and the main sub-processes of DM. Furthermore, the model proposed
by Croxton et al. (2001) has been used, including the analysis of the strategic
sub-processes.
6. Identification of the way to solve each critical issue and the impact on
CSF
Based on the preliminary assumptions, in this section, the way to solve each critical
issue with the support of a contract will be identified. The proposed solutions are
identified on the basis of the literature analysis and because of the suggestions
obtained from the interviews completed with multi-brand retailers.
In addition, the influence of these critical issues on the CSFs will be presented, thus
illustrating the benefits of solving the critical areas identified above. In fact, inadequate
management of the DM process influences several CSFs, thereby demonstrating the
importance of carefully managing this operational process for luxury companies and
jewellery companies.
Table I summarises the associations between DM critical issues and the influenced
CSFs, which are described in detail in the following paragraphs.
Table I demonstrates that for the jewellery industry the realisation of perfect and
very accurate products may be not enough to assure the success and the complete
achievement of the company strategy. Operational processes, as well as DM, could
strongly determine the companys success, thereby influencing aspects such as the
brand reputation or the level of exclusivity.
6.1 Long-term oriented group

Regarding the different perception of the product range by the BO and the retailer, two
main solutions could be adopted for this issue:
Contract design
and SCM
619
Figure 5.
Step 3 identification of
the sub-process of demand
management influenced
by each critical issue
Emotional Brand Creation of a

Critical issue Exclusivity appeal reputation Uniqueness lifestyle
Different perception of the

product range
Defining and managing the
product portfolio
Absence of a PMS
Lack of information sharing
No clear definition of roles
Request of order
continuity
Lack of a policy for the
management of unsold
products and stock
management Table I.
Management of lead-time Step 5 Identification of
variability the impact on the CSF
IJRDM (1) Encouraging the retailers to understand and increase the brand reputation of
40,8 the specific products. The solution of incentives could be adopted: incentives to
encourage retailers purchasing, to increase the space dedicated to the brand,
and discounts measured proportionally to the turnover guarantee could be
useful in increasing the brand importance perceived by the retailer.
(2) Encouraging cooperation among the actors, for growth based on a common and
620 long-term perspective. The two actors should operate using a SC approach, thus
defining the level of stock together.
These contractual conditions are functional in making the same CSFs equally
important for the retailer and the BO. This could also improve the brand reputation
perceived by the customer.

Defining and managing the product portfolio could be solved with better
communication among the actors: a shared strategy should be defined to identify the
optimal stock level for both the retailer and the BO. Once this level has been defined,
the minimum order quantity, the number of products to maintain and the number of
pieces for each product could be defined in the contracts. To avoid a relationship that is
too restrictive, it is important to revise this value at a predefined date and in cases in
which one of the parties does not agree with the previous contract. These solutions also
allow the reduction of the criticality referred to as the No clear definition of the roles
during forecasting activities. In addition, specific incentives oriented to concurrently
potentiate the CSFs of the retailer and the BO could be adopted (e.g. incentives for
payment of additional sales force).
It is important to define clearly and jointly the product range because it could
influence several CSFs. By ensuring that the product is in the stores, exclusivity is
maintained because the promotional limited editions are available in the store, and the
emotional appeal related to the service level is guaranteed. This method of developing
the process clarifies the roles and responsibilities of the parties in the process, thus
increasing the efficiency of the overall process and reducing the forecast errors.
Moreover, the retailer perceives a stronger sense of responsibility, and a fair sharing of
risk and benefits is guaranteed. A stronger sense of retailer responsibility could be
transferred during sales activities, thus improving the products brand reputation and
the emotional appeal for the customer.
Third, using a contract that includes specific clauses that encourage the retailers to
attend specific training courses to ensure the sharing of both strategic and operational
issues and information can solve the problem of the absence of a performance
measurement system. In addition, a PMS, which includes both quantitative and
qualitative key performance indicators (KPIs), should be implemented to drive the SC
behaviours, which safeguards both the retailer and the BO, and should include KPIs for
both the retailer and the BO. The involvement of the retailer in the Develop framework
metrics phase of the DM process could ensure a stronger alignment of the metrics
used along the whole SC.
The resolution of this critical issue could increase the emotional appeal guarantee
by the retailer during the purchase because of the alignment between the retailers and
the BOs perceptions of the brand.
6.2 Forecast oriented group Contract design
Lack of information sharing about demand forecasting could be reduced by changing and SCM
the relationships among the actors and introducing a coordinated effort among them.
Information sharing would ensure several benefits to the BO:
.
a clearer comprehension of customers tastes;
.
an improvement in performance due to the centralised management of critical
and expensive materials; and 621
. guaranteed availability of products in stores.
Furthermore, information sharing could directly simplify the DM process, thus

reducing the stock-out and overstock probabilities, and could lead to more flexible
order management. These solutions could improve the emotional appeal experienced
by the customer during the purchase and could make the retailer more conscious of
brand peculiarities that are involved in the creation of a lifestyle. Moreover, the
elimination of the overstock could reduce the possibility that the customers do not
understand the exclusivity and the uniqueness of the products because of the discount
offered by the retailers, possibly even without the BOs awareness.
Some retailers, especially smaller ones, cannot solve the constraints related to order
continuity. To ensure a minimum level of product in each store without imposing tight
constraints on the retailer, the limits of the contract should be jointly defined by the
retailer and the BO. Possible solutions include the complete elimination of this clause or
the definition of contract-clauses related to a minimum number of orders per year
instead of a minimum rate of turnover per year. By eliminating these clauses, the
retailer would be incentivised to order greater quantities at the beginning of the season.
This improved approach could increase the service level and consequently the
emotional appeal.
6.3 Operational oriented group

Considering the lack of a policy for the management of unsold products and stock
management, the current situation does not consider any possibilities of recovering
unsold products, thus reducing the quantities purchased by the retailer to reduce
their risk and incentivising retailers to sell the products at a substantial discount. To
solve this critical issue, the BO should recover the unsold products, or at least a given
quantity of them. This approach could reduce the risk of allowing the retailer to
return products. The former behaviour (i.e. the reduction of the quantities purchased
by the retailers) could reduce the service level and decrease the emotional appeal of
the products; the latter (i.e. the sale of products at a substantial discount) is more
problematic because of the impact on the uniqueness of the products (if the products
are sold at a discount price, they are no longer perceived as unique), the brands
reputation, and the exclusivity of the products.
As regards management of lead-time variability, to increase the success of all the
other proposed solutions it is necessary to reduce the variability to manage the SC.
Therefore, the lead-time should be specified and deliveries should occur on time, thus
increasing the effective management of intermediate replenishment. Given that the
contract should consider the points of view of both the BO and the retailer, specific
clauses related to this issue should be included in the contract. In contrast, the contract
could also consider penalties in case of delays.
IJRDM 6.4 Suggestion of an optimal contract
40,8 Given the critical issues mentioned in the previous paragraph, Cachon (2004) and
Narayanan and Raman (2004) identify a contract as the most suitable tool to strive for
a collaborative SC. The adoption of a powerful contract system allows the
anticipation and solution of possible misalignment in the actors behaviours and the
sharing of cost, risk and benefits. However, for a contract to be effective, it should be
622 designed according to the specific requirements of the particular industry. Therefore,
according to the solutions identified in the previous paragraph, a new contract should
be formulated to include specific clauses that safeguard the actors involved. To
assure the pertinence of the new contract, a typical contract adopted in Italy to rule
the relationships among retailers and BOs in the jewellery industry was used as a
starting point to formulate the new one, thus giving suggestions for some specific
clauses.
The contract proposed here (see Table II) implies the slight modifications of some
important clauses between retailer and BO. As the previous table shows, stronger
requirements are desired by both actors, thus assuring a fairer split of both costs and
benefits.
7. Conclusion and future research

In this paper, the DM process in the jewellery industry has been analysed to identify
the critical issues of this process. This analysis demonstrates the importance of SCM
processes to gain a competitive advantage in the luxury industry. This relevance has
been addressed showing the negative influence that critical issues in DM could have
on the luxury CSFs. In addition, the literature highlights the importance of contract
design as a means of coordination along the whole SC. In this paper, the value of the
contract in overcoming critical DM issues has been suggested, and the main clauses
that should be included in contracts to ensure an optimal approach with a SC
perspective were highlighted.
The findings presented in this paper contribute to the research in this field, not
only by showing the competitive importance of a strategic SCM process for luxury
companies but also by emphasising the value of contracts in overcoming existing
problems. Regarding managers, we hope that such results help in highlighting the
critical role of contracts for luxury firms, by providing insights on both the critical
areas of the DM process and the influence of contracts on the competitive
performance of these firms.
Some limitations of this work could also be highlighted given the qualitative
nature of the study: in future developments, quantitative analysis should be
performed in order to statistically verify the critical issues identified and to better
compared the different perceptions of BOs and retailers.
The future development of this research is two-fold. First, the contract identified
should be applied to a real company to identify the potential benefits and areas for
improvement. Second, the possible financial benefits of a SC-oriented approach
because of a better contract will be quantified using a simulation model.
Contract clauses
Contract design
Group Critical issue Retailer BO General Both and SCM
Long-term Different Ensuring shelf Ensuring a Offering the
oriented perception of the space for the BOs discount possibility of
group product range products proportional to the terminating the
Not using different percentage of the contract in case of
brands out of annual turnover of violation of the
respect for the the retailer previous conditions 623
declared brands Ensuring fair
incentives to the
retailer
Defining and Assuring the Offering the Requesting
maintaining the minimum level of possibility of modifications in the
product portfolio variants, jointly terminating the contracts if the
defined with the BO contract in case of modifications are

Requesting a violation of the perceived as fair
minimum level of previous conditions
variants and
products
Absence of a PMS Assurance to follow Sharing an
a number of integrated
training courses, as forecasting system
defined by the BO and confidential
information
necessary to
develop the
performance
measurement
system
Forecast Lack of Communicating to Communicating Sharing costs and
oriented information- the BO quantitative data about responsibilities,
group sharing about data about sell out, promotional plans, strategies, future
demand forecasting levels of inventory, forecasting plans, plans and
consumer fashion events, etc., confidential data
behaviours, to the retailer
problems identified,
etc.
Completing specific
forms about the
information
previously cited
No clear definition Sharing a common
of roles during system for the
forecasting development of
activities forecast plans,
confidential
information and
costs due to
forecast errors
Request for order Eliminating duties
continuity related to this issue
Operational Lack of policy for Recovering a given
oriented the management of amount of unsold
group unsold products products,
and stock proportional to the
management turnover guarantee
Management of the Contractually
lead time defining the lead
availability time
Paying pecuniary Table II.
penalties in case of Step 6 formulation of
delay the new contract
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Appendix. Data obtained through the multi-brand interviews Contract design
and SCM
Topic Question Summarised answer
Product How many product categories for In most cases, retailers are obligated to
variety brand? accept all the product categories
offered 627
How many versions (colour and size) It depends on the type of product. For
per product? products with a low rotation rate, the
retailers tend to have only one version
of each product. If the product is less,
expensive, the average is three or four.
If the product has a high rotation rate,
several versions (almost all colours

and all sizes) are maintained
Who decides the product mix? The product mix is decided by the
retailers, in conjunction with the brand
owners suggestions. With the
strongest brands, in some cases the
brand owner imposes the product mix
Product How many units for product version? It depends on the level of luxury of the
availability brand: for accessible luxury brands,
retailers maintained a higher average
number of units (higher than two); for
the aspirational and especially high
luxury brands, and average of one unit
per product version
Are products with a short lifecycle It depends on the brand under study.
always available at the POS? For more expensive brands, this is
always true; for the less expensive
brands, it is not
Do you maintain stock of the Retailers tend not to maintain stock of
products? most products, if not obligated. The
most frequently sold products (e.g.
rings) tend to be covered with a higher
level of stock
Are replenishments possible? Almost all brand owners allow the
replenishment of products; almost no
brand owner allows the reduction of
quantities already ordered
Supply chain Are data about the real sales Few brands require sell-out data
visibility communicated to the brand owner?
Can the brand owner see the level of No information about inventory level
the retailers inenvtory? is communicated
How long is the lead time (from The situation is very heterogeneous in Table AI.
placing the order to receiving the relation to the brand considered. The Data obtained through
product)? lead time takes from seven days (only the multi-brand
one case) to three months interviews
IJRDM About the authors
Alessandro Brun holds a Masters degree with honours in Production and Management
40,8 Engineering and a PhD in the same subject. He is a Teacher of Quality Management at
Politecnico di Milano, and Director of Training Programmes on Six Sigma at MIP Politecnico di
Milano. His main research streams are related to supply chain management and operational
improvements in manufacturing and service industries, with a particular focus on luxury goods
and services. Alessandro Brun is the corresponding author and can be contacted at:
628 alessandro.brun@polimi.it
Antonella Moretto is a PhD Candidate at Politecnico di Milano. She graduated in
Management, Economics and Industrial Engineering at the Politecnico di Milano with a thesis
discussing the development of a value assessment model to quantify the benefits of
e-procurement. Her research interests are in the fields of supply chain management and supply
chain collaboration in the international context.
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2.2 Demand management

widespread in SCM practice. This subject is usually approached in a very technical

contract is more important to ensure collaboration.

of ambiguous words were clarified with the participants via follow-up

3.2 Sample selection

4. Main findings from the BOs

5. Identification and categorisation of the main critical issues of the DM

The long-term oriented group concerns the long-term management of the

6.1 Long-term oriented group

Emotional Brand Creation of a

Different perception of the

perceived by the customer.

Furthermore, information sharing could directly simplify the DM process, thus

6.3 Operational oriented group

7. Conclusion and future research

defined with the BO contract in case of modifications are

advance-purchase discounts contracts, Management Science, Vol. 50 No. 2, pp. 222-39.

Tsay, A. (1999), Quantity-flexibility contract and supplier-customer incentives, Management

several versions (almost all colours

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