Improving supply chain performance and managing risk under weather-related demand uncertainty

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalNot applicablepeer-review

52 Scopus Citations
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Author(s)

Detail(s)

Original languageEnglish
Pages (from-to)1380-1397
Journal / PublicationManagement Science
Volume56
Issue number8
Publication statusPublished - Aug 2010
Externally publishedYes

Abstract

We 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. © 2010 INFORMS.

Research Area(s)

  • Supply chain coordination, Weather derivatives, Weather risk, Weather-linked rebate