Weather rebate sharing contract for enhancing supply chain performance

Abstract

Weather risk in a supply chain has become a potential issue. We propose a new class of contract, a weather rebate sharing contract, that enhances the supply chain performance under weather risk. To design the contract parameters, the risk aversion of supply chain members is taken into account. The Conditional Value at Risk (CVaR) function is used to measure a firm’s objective under risk. The optimal hedging and ordering decisions are obtained by maximizing the CVaR of the supply chain’s expected profit. The weather rebate sharing contract parameters have been designed so that both parties obtain a Pareto-improving solution. We have investigated the performance of the traditional revenue sharing contract and our designed contract under weather risk by using industry demand data and corresponding temperature data. Irrespective of the risk aversion of the supply chain members, we conclude that our designed contract coordinates effectively under all weather conditions and performs better than a traditional revenue sharing contract. Moreover, our results show that the designed contract coordinates under different weather conditions and provides a better coordination framework than the previously designed contracts under weather risk. We recommend that practitioners use this class of contract for administering the supply chain under weather-related uncertainties.