Information sharing in an MTO supply chain with upstream adjustments

Abstract

We study a make-to-order (MTO) supply chain that includes a manufacturer and its supplier, both of which are MTO firms. Once a manufacturer receives an order from a customer, the manufacturer orders needed parts from its supplier. The supplier can adjust its delivery of parts in terms of locations, batches, schedule, etc., to address the manufacturer’s delivery preference. Information sharing is required for the supplier to make a delivery adjustment. We model the problem as a multi-stage game between the supplier and the manufacturer to analyze their incentives to share information. We abstract the information to be shared as the supplier’s production load (downstream information sharing) and the manufacturer’s ideal delivery plan (upstream information sharing). We find that the supplier shares information if its production load is distributed over higher values. The manufacturer shares information if the supplier’s production load is low enough or if the distribution of production loads is less than a threshold – depending on whether the supplier shares information. We also show that the supplier can design a price ceiling mechanism to motivate upstream information sharing, and that a price ceiling increases the supply chain’s profit and yields equivalent customer welfare. Finally, we show how an outside option can provide a naturally formed price ceiling. Our results find the root cause why information sharing in a MTO supply chain is sometimes easy to achieve, and sometimes difficult. The insights from this research can be easily applied in other types of supply chains with similar structures.