Pay upfront or pay later? Fixed royal payment in sustainable fashion brand franchising

Ya Jun CAI, Yue CHEN, Tana SIQIN, Tsan Ming CHOI*, Sai Ho CHUNG

*Corresponding author for this work

Research output: Journal PublicationsJournal Article (refereed)peer-review

16 Citations (Scopus)

Abstract

In the fashion industry, many brands operate under different kinds of franchising systems. In many cases, there is a fixed royalty charged by the franchisor. We observe that some franchisors insist on charging the fixed royalty as an upfront payment (before starting the franchising operations), whereas some request the franchisees to pay after the franchising operations have started. We name the first scenario as the upfront payment (URP) plan and the later one as the later payment (LRP) plan. In this paper, based on real world observed franchising arrangements for sustainable fashion brands, we build analytical models to compare the URP plan and the LRP plan from the supply chain finance perspective. We find that the social welfare performance (SWP) under the URP scenario depends on the value of royalty payment, while the SWP under the LRP scenario is not affected by the royalty payment. Moreover, the profit risks of the franchisee, the supply chain and the social welfare all increase with the order quantity. In the extended model, we explore the case when both the fixed royalty and the variable royalty co-exist. Finally, we explore the supply chain coordination problems and generate managerial insights.

Original languageEnglish
Pages (from-to)95-105
Number of pages11
JournalInternational Journal of Production Economics
Volume214
Early online date3 Apr 2019
DOIs
Publication statusPublished - Aug 2019
Externally publishedYes

Bibliographical note

The authors sincerely thank the guest editor, Professor Hing-Kai Chan, for his kind invitation to contribute to this important IJPE special issue. Tsan-Ming Choi's research is partially supported by Research Grants Council (Hong Kong) – General Research Fund (No.: PolyU 152294/16E ). The authors also acknowledge the funding supports by The Hong Kong Polytechnic University.

Keywords

  • Franchise
  • Royalty
  • Supply chain coordination
  • Supply chain finance
  • Sustainable fashion brands

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