Contracting to Assure Supply: How to Share Demand Forecasts in a Supply Chain

By Gérard P. Cachon, Martin A. Lariviere. Management Sciences, 2001

1,080 citations recorded by the source corpus.

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.

Subfields: Management Information Systems, Management Science and Operations Research, Strategy and Management

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Citations in the corpus

Forecasting and operational research: a review (2008, background): “The only recent high citation articles concern the effects of uncertainty on the supply chain (Chen et al, 2000, with more than 100 citations, and Cachon and Lariviere, 2001, with 50).”
Impact of eBusiness technologies on operational performance: The role of production information integration in the supply chain (2007, background): “…et al. (2004), Frohlich and Westbrook (2002) and Poirier and Quinn (2003) Production information integration (1) Sales forecast Barua et al. (2004), Cachon and Lariviere (2001), Frohlich and Westbrook (2001), Krajewski and Wei (2001) and Lee et al. (1997) (2) MPS Barua et al. (2004), Frohlich and…”
Information Sharing in a Supply Chain with a Common Retailer (2013, background): “Several papers consider information sharing in a one-to-one supply chain and investigate issues such as signaling unverifiable information (Cachon and Lariviere 2001), dual distribution channels (Yue and Liu 2006) and bilateral information sharing (Mishra et al. 2009). Ha and Tong (2008) and Ha et a”
Association Between Supply Chain Glitches and Operating Performance (2005, neutral): “Academicians and practitioners are discussing the impact of supply chain glitches on performance, and are highlighting the need to adopt practices that can prevent glitches (Kilgore 2003, Radjou 2002, Cachon and Lariviere 2001, Lakenan et al. 2001, Lee et al. 1997, Fisher 1997). Although it is intui”
Mitigating Incentive Conflicts in Inter-Firm Relationships: Evidence from Long-Term Supply Contracts (2013, background): “Similarly, suppliers often have limited information about the buyer’s financial quality and downstream product demand (Cachon and Lariviere, 2001).”
Competition and cooperation in a single-retailer two-supplier supply chain with supply disruption (2010, background): “Recent literature includes the papers by Lariviere and Porteus (2001), Wang and Gerchak (2003), Tomlin (2003), Bernstein and DeCroix (2004), and Cachon and Lariviere (2001) , among others.”
Procurement management using option contracts: random spot price and the portfolio effect (2010, background): “Cachon and Lariviere (2001) studied how to share demand forecasts credibly with a contract consisting of firm commitments and options.”
Game Theory in Supply Chain Analysis (2004, background): “For example, Cachon and Lariviere [23] consider a model with one supplier and one manufacturer.”
Flow Coordination and Information Sharing in Supply Chains: Review, Implications, and Directions for Future Research (2002, background): “Cachon and Lariviere (1999a, 1999b) study product allocation strategies as a coordination mechanism, while determining capacity levels is addressed in Cachon and Lariviere (1999c, 2001).”
Managing Functional Biases in Organizational Forecasts: A Case Study of Consensus Forecasting in Supply Chain Planning (2009, background): “Across the supply chain, forecast sharing is a prevalent practice for proactively aligning capacity and managing supply (Cachon and Lariviere 2001, Terwiesch et al. 2005).”