Value of Information Sharing and Lead Time Reduction in a Supply Chain with Autocorrelated Demand

Abstract

We consider the two level supply chain of Lee et al. (Manage Sci 46(5):626–643, 2000) with nonstationary demand that follows an AR(1) process. Without information sharing in the supply chain, the retailer only conveys his order. With information sharing, the retailer at the end of the period, in addition to conveying his order also conveys his demand level for the period. The use of a model of autocorrelated demand becomes important, given empirical work that demand for a high percentage of SKUs at a supermarket can be autocorrelated. This is because of the repeat purchase behaviour of customers. We show some results which have been observed in the numerical experiments of Lee et al. (2000). In the two level supply chain of Lee et al. (2000), we show that the reduction in manufacturer costs with information sharing increases, as the demands become more correlated over time. In Lee, So and Tang’s model, we also consider the effects of a reduction in lead time from the manufacturer to the retailer, on retailer and manufacturer costs. We show that a reduction in lead time reduces the retailer’s costs more than the manufacturer’s costs.