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

13 years 3 months ago

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This paper considers 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. For weather rebates with certain characteristics, the manufacturer can fully hedge his risks of oﬀering a weather rebat...

Frank Youhua Chen, Candace Arai Yano

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