Impacts of Manufacturer Overconfidence on Supply Chain Performance with Demand Forecasting

Abstract

In this paper, we construct a dyadic supply chain consisting of a single manufacturer with overconfidence and a rational retailer under the MTO strategy. The manufacturer and the retailer play a Bayesian Stackelberg game in our model. We consider that the manufacturer may underestimate the variability in his forecast precision (PR bias). We derive the optimal decisions for two supply chain scenarios: one dominated by manufacturers (MS) and one dominated by retailers (RS). Our results suggest that both the manufacturer and the retailer can achieve profit growth under PR bias, but the forecasts made by each side must meet certain conditions. Further, the impacts of each type of overconfidence on SC performance are similar under the MS and RS models, and the manufacturer is always more likely to benefit from his confidence under the RS model than under the MS model. In addition, the influences of the overconfidence on retailers’ profits require additional judgment with effort costs.