7. Conclusion
This paper analyzed the impact of substitution in a multi-level supply chain that supplies multiple substitutable products. The results reveal that ignoring product substitution can lead to a significant overestimation of value of information sharing, especially for firms that are more upstream in the supply chain. We made several simplifying assumptions in our analysis. For instance, we assumed that the lead time for all firms is zero. We made this assumption because the impact of lead time has been considered by prior literature that does not consider substitution. We do not anticipate that lead time will alter the impact of substitution qualitatively. However, an increase in lead time is likely to increase the value of information sharing in general, and increase the reduction in value of because of product substitution. We assumed an AR(1) model for the demand forecasting process. However, the qualitative nature of our results is not dictated by the specific demand model. While the magnitude of the value of information sharing under substitution and no substitution will depend critically on the demand model and the level of demand uncertainty, the impact of substitution is not likely to change. Future research should address other demand forecasting models with substitution. Our model assumes that all products are symmetric; that is, demand models and costs are identical across products. This was done to isolate the effects of substitution so that factors such as demand sizes and costs do not contaminate our findings. However, products could differ in their inventory holding and shortage costs, production costs, mean demands, and other parameters. We believe that firms that have higher inventory holding and shortage costs will benefit more from information sharing, and correspondingly realize a smaller value when products are substitutable. Future research can look into relaxing the above limitations and identify the exact impact of these limitations.
7. Conclusion
This paper analyzed the impact of substitution in a multi-level supply chain that supplies multiple substitutable products. The results reveal that ignoring product substitution can lead to a significant overestimation of value of information sharing, especially for firms that are more upstream in the supply chain. We made several simplifying assumptions in our analysis. For instance, we assumed that the lead time for all firms is zero. We made this assumption because the impact of lead time has been considered by prior literature that does not consider substitution. We do not anticipate that lead time will alter the impact of substitution qualitatively. However, an increase in lead time is likely to increase the value of information sharing in general, and increase the reduction in value of because of product substitution. We assumed an AR(1) model for the demand forecasting process. However, the qualitative nature of our results is not dictated by the specific demand model. While the magnitude of the value of information sharing under substitution and no substitution will depend critically on the demand model and the level of demand uncertainty, the impact of substitution is not likely to change. Future research should address other demand forecasting models with substitution. Our model assumes that all products are symmetric; that is, demand models and costs are identical across products. This was done to isolate the effects of substitution so that factors such as demand sizes and costs do not contaminate our findings. However, products could differ in their inventory holding and shortage costs, production costs, mean demands, and other parameters. We believe that firms that have higher inventory holding and shortage costs will benefit more from information sharing, and correspondingly realize a smaller value when products are substitutable. Future research can look into relaxing the above limitations and identify the exact impact of these limitations.
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