23.12.2015

The Strategic Sharing of Information in Supply Chains

GUO, Liang | LI, Tian | ZHANG, Hongtao

Retailers are sharing more information than ever with their suppliers, according to US data. But in this day and age when things like raw data can be shared automatically, some retailers may still prefer to communicate via more traditional channels such as email, phone, fax and meetings. This gives them more opportunity to screen what they share.

For Liang Guo, Tian Li and Hongtao Zhang, it also an opportunity to examine how retailers in competing supply chains might strategically disclose information about sales demand to get manufacturers to lower the wholesale price.

They devised a model based around two competing supply chains, each with a manufacturer and retailer in an exclusive partnership, in which each retailer has the ability to discover the potential market size. When the retailer decides whether to disclose the information to their manufacturer, he will be well aware that the competing chain is engaged in similar information acquisition and sharing. All this activity precedes price-setting by both the manufacturer and retailer, so the retailer will be angling to get the best deal.

What the model reveals is that retailers have an incentive to share relatively unfavourable market information with the manufacturer to induce the latter to set low wholesale prices – in other words, he has a certain threshold below which he will share the market signal. But when demand is high, “a retailer can credibly conceal the information due to the imperfection of information acquisition because his manufacturer cannot know whether non-disclosure is due to lack of information or strategic concealment,” they said.

The threshold nonetheless increases with the retailer’s ability to acquire information, and this implies that they will disclose more information with greater such ability. However, retailers may not want to have perfect information capability even when it comes at no cost because then it would be more apparent that they were withholding information due to strategic concealment, and manufacturers would respond accordingly.

“Knowing this, manufacturers could form more optimistic expectations of the market potential and thus charge higher wholesale prices that hurt the retailer,” they said.

When all of this is applied to competing supply chains, it becomes likely that the retailers’ threshold for information sharing will decrease when the intensity of competition increases, meaning less information is shared within each chain.

Nonetheless, the benefits of improving information capability would become stronger in this market, giving retailers incentive to enhance their capability to acquire information. Moreover, when one retailer improves its capability, the rival supply chain benefits, too, as it faces more variable demand and generates more profit through responsive pricing.

The authors conclude that the workings of the model offer some insights for managers. An informed retailer that wants better transaction terms from manufacturers should disclose information only if the realised market demand is relatively low. But he should also raise the disclosure threshold and disclose more information when his capability to acquire information improves, keeping in mind that he wants to avoid perfect information capability.

In a competitive situation, the authors suggest retailers should disclose less information to their manufacturers. Their incentive to improve their information capability is likely to increase with the intensity of competition and with their rival’s information capability, but they should be aware that as their informational capability increases, the firms in the rival supply chain could become better off.

“The results suggest that when retailers make decisions on whether to share demand information or acquire better information acquisition instruments or processes, they should direct more scrutiny towards these effects of inter-chain externality,” they said.

ZHANG, Hongtao

Professor, Director of Center for Marketing and Supply Chain Management
Information Systems, Business Statistics & Operations Management