Buying weather contracts to support retail promotions

A BloombergBusinessweek article (Sept 5, 2011) article on weather related risk management describes a retail promotion by a parka manufacturer, Weatherproof Garment, that promised promised Macy’s credit card customers reimbursement of the cost of parkas if weather was freezing on Thanksgiving day in 2009. To cover the risk, the CEO purchased derivatives to pay if the temperature dropped below freezing.  The impact was a 11 % sales increase. Is the supply chain retail stimulation and associated cost of risk a profitable approach to sell parkas ? Is the cost to cover supply chain risk be lower using derivatives lower because of the risk pooling across buyers and sellers of these derivatives ? What other weather related supply chain risks are optimally covered using financial instruments ?

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About aviyer2010

Professor
This entry was posted in Operations Management, Service Operations, Supply Chain Issues and tagged , , , , , , . Bookmark the permalink.

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