Investing in Forecast Collaboration

Abstract

Motivated by the mixed results of collaborative forecasting initiatives in the fast-moving consumer goods sector, this paper investigates the conditions that favor the establishment of collaborative forecasting between a supplier and a retailer. We consider a two-stage supply chain where a single supplier sells to a single retailer who faces the newsvendor problem. Both the supplier and the retailer have forecasting capabilities and both can exert costly effort to improve the quality of their local demand forecasts. We assume that the supplier and the retailer exert effort independently and then pool their local forecasts to form a single shared demand forecast. We interpret the existence and stability of an equilibrium in which both parties invest in improving the forecast quality as collaborative forecasting being sustainable. We characterize conditions under which collaborative forecasting is sustainable. Our results have implications concerning the appropriateness of investing in collaboration technology to extract and use information from both parties in a supply chain.

Keywords: supply chain management, demand forecast collaboration, CPFR, information exchange, forecast quality