An approach to minimize inventory risk due to weather using buyback contract with weather rebate

Abstract This paper addresses the inventory risk owing to weather fluctuations faced by retail companies and designs a new class of contract incorporating financial risk hedging. The designed contract not only coordinates the supply chain as the buyback contract does but also improves the supply chain profit by considering the inventory risk due to weather fluctuations. In a buyback contract, the supplier shares a fraction of its revenue with the retailer to compensate for the inventory risk, affecting the supplier's profitability. However, in the proposed contract, the supplier benefits from financial risk hedging in the case of unfavorable weather conditions. This limits the supplier's downside risk, and the supplier mainly uses the gain from the risk hedging to compensate the retailer. Real temperature and demand data are used to analyze the contracts and draw managerial insights. The numerical results show that the designed contract benefits both parties, improves supply chain profit on average by , and minimizes inventory risk as compared to the traditional buyback contracts under weather risk.