Transfer of newsvendor inventory and supply risks to sub-industry and the public by financial instruments

We consider a two-stage newsvendor model of a sub-industry in which suppliers have short lead-time capacity to produce goods for retailers that are selling non-identical products. We argue that the inventory and supply risks of the newsvendors due to demand uncertainty can be pooled and shared among different supply chains by treating reserved capacity as commodities and trading them as futures and options on futures to hedge the risks. The risks will be further shared with and transferred to the public if speculators are allowed to play the game. We show that this new mechanism of combining operational and financial risk hedging strategies offers industries a new way to more efficiently meet demand and improve profit.