Investing in Forecast Collaboration

We study the strategic interaction between supply chain partners involved in collaborative forecasting. Motivated by the mixed results of collaborative forecasting initiatives in the consumer goods sector, we analyze the potential of Collaborative Planning, Forecasting, and Replenishment (CPFR) as well as possible barriers to its implementation. We model a supplier and retailer who can invest in improving the quality of their demand forecasts. Strategic interaction takes place at the (1) information acquisition stage and (2) information sharing stage. Our model shows that CPFR can significantly increase supply chain profits, provided that management avoids common pitfalls. We suggest reasons for failure of CPFR initiatives rooted in poor implementation and misdirected managerial expectations. Key words: supply chain management, demand forecast collaboration, CPFR, informa-tion exchange, forecast quality. 1