On the Benefits of Collaborative Forecasting Partnerships Between Retailers and Manufacturers

This paper studies the potential benefits of collaborative forecasting (CF) partnerships in a supply chain that consists of a manufacturer and a retailer. To reflect the reality in production environments, we propose a scorecard that captures inventory considerations, production smoothing, and adherence-to-plans. We present a prescriptive convex-cost production planning model for the manufacturer, and a replenishment model for the retailer. We use our integrative reference model to study the potential benefits of CF partnerships. Overall, we find that the benefits of CF depend on the following key characteristics of the supply chain: The relative explanatory power of the supply chain partners, the supply side agility, and the internal service rate. CF is expected to bring high benefits to the supply chain when the manufacturer has the largest relative explanatory power. But quite disappointingly, in these cases a CF partnership does not appear to be valuable to the manufacturer. When the retailer is the dominant observer of market signals, CF typically yields a “win-win” outcome. In order to effectively act upon the information exchanged via CF, the supply side needs to be sufficiently agile. The benefits reported in this paper should be considered as conservative. This is because CF partnerships often bring better information, improved decision support technologies, as well as process improvement to the trading partners. Consequently, the supply side agility can be improved. If this indeed happens, the compound benefits of CF can be dramatically higher than our conservative estimates. Finally, we provide a qualitative discussion of the possible role of internal service rates in supply chains, either as planning parameters to improve performance, or as a mechanism for sharing the benefits of CF between the trading partners.