On market demand mis-specification in a two-level supply chain

Thirteenth Manufacturing and Service Operations Management Conference, 5th-6th June, University of Maryland, USA.

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Abstract

This paper investigates the impact of mis-specifying the market demand process on a serially linked two-level supply chain. Box-Jenkins models are used to represent both the true market demand process and a mis-specified model of the market demand process. Our analysis suggests that mis-specification does not always result in additional costs. Indeed by exploiting mis-specification, the supply chain can reduce both the total supply chain inventory and the production costs simultaneously. A managerial insight is revealed: Poor forecast accuracy is not always bad for the supply chain costs, from a total cost viewpoint. In other words, employing more accurate forecasting methods may actually result in higher total supply chain costs.