Assessing The Benefits of Demand Information Sharing in a Simple Supply Chain

Guillermo Gallego

Department of Industrial Engineering

and Operations Research

Columbia University

We assess the benefits of demand information sharing to a supplier receiving batch orders from a retailer facing Poisson demands and economies of scale in ordering. We show that for a supplier with constant lead times, and linear holding and shortage costs the optimal policy under demand information sharing calls for delaying orders until the retailer sees a given number of demands.

We compare this to the best base-stock policy without information sharing and find that the cost difference can be very large. We also find, however, that (i) the retailer’s cost may go up by sharing demand information, and (ii) using a delay base-stock policy can significantly reduce the cost gap when the retailer is unwilling to share demand information. These results demonstrate that the retailer’s willingness to share demand information should not be taken for granted, and that base-stock policies can be far from optimal when order inter-arrival times are not exponentially distributed. It also opens the possibility for selling rather than sharing demand information.