Value of Information Design in Supply Chain Management

This paper studies an information design problem of a retailer in a two-tier supply chain that procures a single type of product from a supplier. The supplier needs to decide on a production quantity by balancing the shortage and the excess inventory holding costs with respect to the retailer’s demand. The retailer’s demand is random but the retailer receives an informative signal about the demand before the supplier sets the production quantity, and places orders after learning the demand realization. The retailer wants to reduce the cost of shortage, and in order to accomplish this she can disclose information about her signal to persuade the supplier to increase production levels. For this setup, we characterize the optimal information disclosure policy of the retailer, and shed light on settings where the retailer strictly benefits from carefully-designed information disclosure policies relative to full or no disclosure policies.