Contracting to Assure Supply: How to Share Demand Forecasts in a Supply Chain

Forecast sharing is studied in a supply chain with a manufacturer that faces stochastic demand for a single product and a supplier that is the sole source for a critical component. Optimal supply chain performance requires the manufacturer to share her initial forecast truthfully, but she has an incentive to inflate her forecast to induce the supplier to build more capacity. The supplier is aware of this bias, and so may not trust the manufacturer's forecast, harming supply chain performance. The contracts that allow the supply chain to share demand forecasts credibly under either compliance regime are studied.