How Improved Forecasts Can Degrade Decentralized Supply Chains

Abstract

This research studies the impact of improved forecasts on the members of a two-stage supply chain. The supplier builds capacity based on original forecast information, and the manufacturer places its order after observing improved (but imperfect) demand information. We study three types of wholesale price purchasing arrangements: (1) when the wholesale price is determined to be exogenous to the supply chain; (2) when the supplier sets the wholesale price; and (3) when the manufacturer sets the wholesale price. Although improved demand information reduces the demand uncertainty that the manufacturer faces, the manufacturer is constrained by the supplier's capacity decision. In all three cases, we show that improved information can decrease the supply chain's expected profit, even as the supplier's capacity increases with improved information. Because improved demand information always increases the centralized supply chain's expected profit, we present a contract that coordinates the channel and provides flexibility in dividing systemwide profit.