The value of Information Sharing in a Supply Chain with Product Substitution

The value of information sharing within a supply chain has been analyzed extensively by researchers. The extant literature has investigated only the case in which the supply chain manufactures and distributes a single product to customers. In this paper, we consider the case in which a supply chain distributes multiple products. These products are also substitutable in the sense that a consumer is willing to buy an alternate product when the customer’s preferred product is out of stock. We show that such substitutability among products generally reduces the value of information sharing. This result occurs because of the demand pooling effect of substitution, which reduces demand variance even before information sharing. The reduction in the value of information sharing because of substitutability is higher when the number of substitutable products is higher and/or when the demands of products are less correlated. However, when information about the demands of only a sub set of products is shared, the value of information sharing under substitution is higher than that under no substitution under certain conditions. The key implication of our findings is that if substitution effects are ignored, then there is a risk of overestimating the value of information sharing. The overestimate can be very significant when either there is a large number of substitutable products or the demands of these products are less correlated and more independent