Improving Supply Chain Performance and Managing Risk Under Weather-Related Demand Uncertainty
AbstractWe consider a manufacturer-retailer supply chain for a seasonal product whose demand is weather sensitive. The retailer orders from the manufacturer (supplier) prior to the selling season and then sells to the market. We examine how a manufacturer can structure a weather-linked rebate to improve his expected profit. The proposed class of rebate contracts offers several advantages over many other contract structures, including no required verification of leftover inventory and/or markdown amounts, and no adverse effect on sales effort by the retailer. We provide a thorough analysis of the manufacturer's and retailer's decisions in this context. We show that the weather-linked rebate can take many different forms, and this flexibility allows the supplier to design contracts that are Pareto improving and/or limit his risk in offering the contract and the retailer's risk in accepting it. For weather rebates with certain characteristics, the manufacturer can fully hedge his risks of offering a weather rebate by paying a risk premium; we show how this can be accomplished. We also show that the basic structural results extend to settings in which the two parties would like to limit their risk.
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Bibliographic InfoArticle provided by INFORMS in its journal Management Science.
Volume (Year): 56 (2010)
Issue (Month): 8 (August)
weather-linked rebate; weather risk; weather derivatives; supply chain coordination;
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- Haiyan Yi & Yangzhen Li, 2013. "Risk management of agricultural supply chain in China with weather compensatory contract," E3 Journal of Business Management and Economics., E3 Journals, vol. 4(7), pages 166-172.
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