Demand Forecast Sharing in Supply Chains

Abstract

This paper examines the incentives of a manufacturer and a retailer to share their demand forecasts. The demand at the retailer is a linearly decreasing function of price. The manufacturer sets the wholesale price first, and the retailer sets the retail price after observing the wholesale price. Both players set their prices based on their forecasts of demand. In the make‐to‐order scenario, the manufacturer sets the production quantity after observing the actual demand; in the make‐to‐stock scenario, the manufacturer sets the production quantity before the demand is realized. In the make‐to‐order scenario, we show that sharing the forecast unconditionally by the retailer with the manufacturer benefits the manufacturer but hurts the retailer. We also demonstrate that a side payment contract cannot induce Pareto‐optimal information sharing equilibrium, but a discount based wholesale price contract can. The social welfare as well as consumer surplus is higher under the discount contract, compared with under no information sharing. In the make‐to‐stock scenario, the manufacturer realizes additional benefits in the form of savings in inventory holding and shortage costs when forecasts are shared. If the savings from inventory holding and shortage costs because of information sharing are sufficiently high, then a side payment contract that induces Pareto‐optimal information sharing is feasible in the make‐to‐stock scenario. We also provide additional managerial insights with the help of a computational study.

Coordination of information sharing in a supply chain

“…Then we show that a revenue sharing contract is coordinative, which ensures that both the supplier and the retailer share their owned information completely. There are some differences between Mishra et al (2009) and this study.…”

“…We first investigate that the impact of information sharing on the supplier, the retailer and the supply chain under wholesale price contract. This is like what most literature do (Mishra et al, 2009;Li, 2002, etc.). We show that, under single price contract, whether a firm reveals its private information depends on the two firms' information precision and correlation and the other firm's information revelation behavior.…”

“…Our research is mostly related to Mishra et al (2009). We also study information sharing in a supply chain in which both of the supplier and the retailer possess partial information about the demand.…”

“…Also they assume that the retailer possesses complete information. Mishra et al (2009) studied information sharing in a supply chain consisting of one supplier and one retailer, in which both of them forecast the demand under make-to-stock and make-toorder scenarios. They showed that sharing forecasts unconditionally benefits the supplier and hurts the retailer.…”

“…(1) In Mishra et al (2009), they considered two cases: both firms share or do not share information simultaneuously. We also consider another two cases: the supplier shares and the retailer does not share and the supplier does not share and the retailer shares.…”