We study a supply chain where an original equipment manufacturer (OEM) buys subassemblies, comprised of two complementary sets of components, from a contract manufacturer (CM). The OEM provides a demand forecast at the time when the CM must order the long lead-time set of components, but must decide whether or not to provide updated forecasts as a matter of practice. Forecast updates affect the CM's short lead-time purchase decision, and the anticipation of updates may also affect the long lead-time purchase decision. While the OEM and CM both incur lost sales costs, the OEM can decide whether or not to share the overage costs otherwise fully borne by the CM. We investigate when the OEM is better served by committing to provide updated forecasts and/or committing to share overage costs. For a distribution-free, two-stage forecast-update model, we show that (1) the practice of providing forecast updates may be harmful to the OEM and (2) at the OEM's optimal levels of overage risk sharing, the CM undersupplies relative to the supply chain optimal quantity. For a specific forecast-update model, we computationally investigate conditions under which forecast updating and risk sharing are in the best interest of the OEM.
All Science Journal Classification (ASJC) codes
- Management Science and Operations Research
- Industrial and Manufacturing Engineering
- Management of Technology and Innovation