Forecasting errors and the value of information sharing in a supply chain

Abstract

The paper investigates the impact of forecasting errors and information sharing on the performance of a supply chain. It also examines the impact of forecasting errors on the value of information sharing between retailers and a supplier. Analyses of the simulation outputs show that while information sharing can bring tremendous benefits to the supplier and the entire supply chain, it hurts the retailers under most conditions. Demand pattern and forecasting error distributions faced by the retailers significantly influence the magnitudes of the cost savings as a result of information sharing. The expected bias in forecast errors has a much more significant impact on supply chain performance and the value of information sharing than the standard deviation of forecasting errors and its pattern of deterioration over time. A slight positive bias in the retailer's forecast can actually increase the benefit of sharing information for the supplier and the entire supply chain. However, it can also increase the cost for retailers. The demand pattern faced by retailers also significantly influences the impact of forecasting accuracy on the value of the information sharing. These findings will motivate companies to share information, and will help to design incentive schemes to encourage information-sharing and justify investment in information-sharing projects. The findings can also be used to minimize the negative impact of forecasting errors on supply chain performance.