Measuring Imputed Costs in the Semiconductor Equipment Supply Chain

We consider the order ful ̄llment process of a customized capital equipment supplier. Prior to receiving a ̄rm purchase order from the customer, the supplier receives a series of shared forecasts, which are called `soft orders'. Facing a stochastic internal manufacturing lead-time, the supplier must decide at what time to begin the ful ̄llment of the order. This decision requires a trade-o® between starting too early, leading to potential holding or cancellation cost, and the cost of starting too late, leading to potential loss of goodwill. We collect detailed data of shared forecasts, actual purchase orders, production lead-times, and delivery dates for a supplier-buyer dyad in the semiconductor equipment supply chain. Under the assumption that the supplier acts rationally, optimally balancing the cancellation, holding, and delay costs, we are able to estimate the corresponding cost parameters based on the observed data. Our estimation results suggest that the cost of cancellation is four times higher and the holding cost is two times higher than the delay cost. In other words, the supplier is very conservative when commencing the order ful ̄llment, which negates the e®ectiveness of the overall forecast sharing mechanism.