Commitment Decisions with Partial Information Updating (ed.1)

Abstract

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.