Supply Chain Collaboration Under Information Asymmetry

Firms manufacturing highly innovative and complex products often rely on the expertise of their suppliers who provide critical components that enable core functionality of products. During the product design stage there is often considerable uncertainty about component production cost, and it is of interest to both the manufacturer and the supplier to enter into a collaborative relationship in order to reduce this uncertainty and the expected cost. Despite the bene…t, however, the supplier might be fearful of revealing his proprietary cost information and thus may be reluctant to fully collaborate. Building on the traditional frameworks of the newsvendor model and adverse selection, we investigate how information asymmetry and contracting strategies a¤ect collaboration outcomes. We compare contracts based on price and quantity, and …nd that the manufacturer may be better o¤ committing to a price early (before the conclusion of product development) since this promotes full collaboration. However, delaying the contract o¤er can also be a viable strategy if (a) collaboration leads to a large decrease of expected production cost but not of cost uncertainty, and (b) large demand uncertainty exists. We also …nd that, paradoxically, e¤orts to reduce demand uncertainty and production lead time may hinder collaboration during product development.