Contracting to assure supply: How to share demand forecasts in a supply chain

Gérard P. Cachon*, Martin A. Lariviere

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

624 Scopus citations

Abstract

Forecast sharing is studied in a supply chain with a manufacturer that faces stochastic demand for a single product and a supplier that is the sole source for a critical component. The following sequence of events occurs: the manufacturer provides her initial forecast to the supplier along with a contract, the supplier constructs capacity (if he accepts the contract), the manufacturer receives an updated forecast and submits a final order. Two contract compliance regimes are considered. If the supplier accepts the contract under forced compliance then he has little flexibility with respect to his capacity choice; under voluntary compliance, however, he maintains substantial flexibility. Optimal supply chain performance requires the manufacturer to share her initial forecast truthfully, but she has an incentive to inflate her forecast to induce the supplier to build more capacity. The supplier is aware of this bias, and so may not trust the manufacturer's forecast, harming supply chain performance. We study contracts that allow the supply chain to share demand forecasts credibly under either compliance regime.

Original languageEnglish (US)
Pages (from-to)629-646
Number of pages18
JournalManagement Science
Volume47
Issue number5
DOIs
StatePublished - May 2001

Keywords

  • Asymmetric Information
  • Coordination
  • Game Theory
  • Signaling

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research

Fingerprint Dive into the research topics of 'Contracting to assure supply: How to share demand forecasts in a supply chain'. Together they form a unique fingerprint.

Cite this