The Value of Information Design in Supply Chain Management

Abstract

This paper studies an information design problem of a retailer in a two-tier supply
chain that procures a single type of product from a supplier. The supplier needs to
decide on a production quantity by balancing the shortage cost and the excess inventory
holding cost with respect to the retailer’s demand. The retailer’s demand is random
but the retailer receives an informative signal about the demand before the supplier sets
the production quantity, and places orders after learning the demand realization. The
retailer wants to reduce the shortage cost, and to this end she can disclose information
about her signal to persuade the supplier to increase production levels. For this setup,
we characterize the optimal information disclosure policy of the retailer, and shed
light on settings where the retailer strictly benefits from carefully designed information
disclosure policies relative to a full- or a no-disclosure policy.

Keywords: information design, supply chain management, newsvendor model, forecast sharing