Information Sharing in Supply Chains: An Empirical and Theoretical Valuation

Management Science 61(11):2803-2824, 2015

37 Pages Posted: 6 Oct 2013 Last revised: 27 Mar 2017

Date Written: November 15, 2014

Abstract

We provide an empirical and theoretical assessment of the value of information sharing in a two-stage supply chain. The value of downstream sales information to the upstream firm stems from improving upstream order fulfillment forecast accuracy. Such an improvement can lead to lower safety stock and better service. Based on the data collected from a consumer packaged goods company, we empirically show that, if the company includes the downstream sales data to forecast orders, the improvement in the mean squared forecast error ranges from 7.1% to 81.1% across all studied products. Theoretical models in the literature, however, suggest that the value of information sharing should be zero for over half of our studied products. To reconcile the gap between the literature and the empirical observations, we develop a new theoretical model. Whereas the literature assumes that the decision maker strictly adheres to a given inventory policy, our model allows him to deviate, accounting for private information held by the decision maker, yet unobservable to the econometrician. This turns out to reconcile our empirical findings with the literature. These “decision deviations” lead to information losses in the order process, resulting in a strictly positive value of downstream information sharing. Furthermore, we empirically quantify and show the significance of the value of operations knowledge—the value of knowing the downstream replenishment policy.

Keywords: supply chain, information sharing, information distortion, decision deviation, time series, forecast accuracy, empirical forecasting, ARIMA process

Suggested Citation

Cui, Ruomeng and Allon, Gad and Bassamboo, Achal and Van Mieghem, Jan Albert, Information Sharing in Supply Chains: An Empirical and Theoretical Valuation (November 15, 2014). Management Science 61(11):2803-2824, 2015. Available at SSRN: https://ssrn.com/abstract=2334352 or http://dx.doi.org/10.2139/ssrn.2334352

Ruomeng Cui

Goizueta Business School, Emory University ( email )

1300 Clifton Road
Atlanta, GA 30322
United States

HOME PAGE: http://www.ruomengcui.com

Gad Allon

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Achal Bassamboo

Northwestern University - Department of Managerial Economics and Decision Sciences (MEDS) ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Jan Albert Van Mieghem (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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