Abstract
The sales volume and price of many commodities depend on weather conditions. Manufacturers can face significant difficulties when the purchase prices of raw materials vary according to weather conditions, and sales prices are dictated by distributors or their customers who are also weather-sensitive. In the agri-food industry, for example, processors must preserve both the profitability of their producers and their own without compromising their relationships with the distributors on whom they depend. We present an approach to understand how weather conditions influence the economics of the entire supply chain and mitigate their financial effects in order to preserve the interests of upstream and downstream partners and reduce cash flow uncertainties for all partners. In our approach, the transfer price or order volume, and the risk of adverse deviations caused by weather conditions are calculated on the basis of observed historical weather conditions. We do not use forecasts of weather conditions. We demonstrate the efficiency of our approach in reducing cash-flow uncertainty and potential losses caused by adverse weather. With climate change, it is expected that weather variability and its consequences on supply chains will continue to increase. Our results apply to all manufacturers whose upstream or downstream partners are exposed to weather variability.