The Value of Collaborative Forecasting in Supply Chains

Motivated by the mixed evidence concerning the adoption level and value of collaborative forecasting (CF) implementations in retail supply chains, in this paper, we explore the conditions under which CF offers the highest potential. We consider a two-stage supply chain with a single supplier selling its product to consumers through a single retailer. We assume that both the supplier and the retailer can improve the quality of their demand forecasts by making costly forecasting investments to gather and analyze information. First, we consider a <i>noncollaborative</i> model where the supplier and the retailer can invest in forecasting but do not share forecast information. Next, we examine a <i>collaborative forecasting</i> model where the supplier and the retailer combine their information to form a single shared demand forecast. We investigate the value of CF by comparing each party's profits in these scenarios under three contractual forms that are widely used in practice (two variations of the simple wholesale price contract as well as the buyback contract). We show that for a given set of parameters, CF may be Pareto improving for none to all three of the contractual structures, and that the Pareto regions under all three contractual structures can be expressed with a unifying expression that admits an intuitive interpretation. We observe that these regions are limited and explain how they are shaped by the contractual structure, power balance, and relative forecasting capability of the parties. To determine the specific value of collaborative forecasting as a function of different factors, we carry out a numerical analysis and observe the following. First, under noncoordinating contracts, improved information as a result of CF has the added benefit of countering the adverse effects of double marginalization in addition to reducing the cost of supply-demand mismatch. Second, one may expect the value of CF to increase with bargaining power, however this does not hold in general: The value of CF for the newsvendor first increases and then decreases in his bargaining power. Finally, whereas one may expect CF to be more valuable under coordinating contracts, rather than a simple wholesale price contract that is prone to double marginalization, the <i>magnitude of the gain</i> from CF is in many cases higher in the absence of quantity coordination.