Collaborative Forecasting and Inventory Management: Capacity Considerations

This paper studies the potential benefits of collaborative forecasting (CF) partnerships in supply chains that are capacity-constrained. Our supply chain consists of a manufacturer and a retailer, that operate in an information-rich environment, where one or both of them may be privy to valuable information that can be used to resolve demand uncertainty. To reflect the reality in capacity-constrained production environments, we propose a set of metrics that capture inventory considerations, production smoothing, and adherence-to-plans. We present a prescriptive production planning model for the manufacturer, and a replenishment model for the retailer. We conduct a numerical analysis to study the potential benefits of CF partnerships, and the way by which the benefits naturally split between the trading partners. Overall, we find that the benefits of CF depend on the following key characteristics of the supply chain: The supply response time, the relative explanatory power of the supply chain partners, and the internal service rate.