Can Supply Chain Flexibility Facilitate Information Sharing?

This paper attempts to provide an explanation for a long-standing observation in supply chain management: while our models typically show that simple contracts cannot induce credible forecast sharing between different parties within the supply chain, why do firms often use them in practice, and exchange information through unverifiable communication (“cheap talk”)? We address this question using a stylized model consisting of a retailer who solicits forecast information from a manufacturer launching a new product. Once information is shared, the retailer decides how much of its budget to invest in procuring inventory of an existing product, and how much to retain as a reserve for the anticipated launch of the manufacturer’s new product. To capture the effect of flexibility on credible forecast sharing, we examine two operational systems: a traditional system, where the retailer must make investment decisions at the beginning of the time horizon, and a flexible system, where the retailer has the option to postpone its procurement decision until learning whether the manufacturer’s product is released. We show that in the traditional system, the manufacturer has an incentive to inflate its forecast, thus, the retailer cannot trust the report. In the flexible system, however, procurement flexibility brings about a situation in which the manufacturer is uncertain about the retailer’s reaction to its report. This uncertainty may induce the manufacturer to report truthfully. Therefore, we show that under complete rationality, firms can employ simple contracts while, at the same time, induce truthful reporting.