(Georgia Institute of Technology, 2004-12-21)
DeCroix, Gregory A.; Zipkin, Paul Herbert
In this paper, we extend the results of Ferguson [10] on an end-product manufacturer's
choice of when to commit to an order quantity from its parts supplier. During
the supplier's lead-time, information arrives about end-product demand. This information
reduces some of the forecast uncertainty. While the supplier must choose its
production quantity of parts based on the original forecast, the manufacturer can wait
to place its order from the supplier after observing the information update. We find
that a manufacturer is sometimes better off with a contract requiring an early commitment
to its order quantity, before the supplier commits resources. On the other hand,
the supplier sometimes prefers a delayed commitment. The preferences depend upon
the amount of demand uncertainty resolved by the information as well as which member
of the supply chain sets the exchange price. We also show conditions where demand
information updating is detrimental to both the manufacturer and the supplier.