• DOI:10.1287/mnsc.1100.1194
• Corpus ID: 999180

Improving Supply Chain Performance and Managing Risk Under Weather-Related Demand Uncertainty

@article{Chen2010ImprovingSC,
  title={Improving Supply Chain Performance and Managing Risk Under Weather-Related Demand Uncertainty},
  author={Youhua (Frank) Chen and Candace A. Yano},
  journal={Manag. Sci.},
  year={2010},
  volume={56},
  pages={1380-1397}
}

• Y. Chen, C. Yano
• Published 1 August 2010
• Business
• Manag. Sci.

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.