Supporting a capital-constrained supplier with mixed pre-shipment financing facilities

Abstract

This study considers a tandem supply chain (S.C.) in which a credit-worthy retailer cooperates with a capital-constrained supplier to manufacture products. The retailer can use two major pre-shipment financing options, either cash in advance (CIA) or pricing support purchase order financing (PSPOF), to fund the supplier’s operations. A model is developed to examine the interactions among the entities. The retailer can choose the prepayment modality, purchase price and order quantity. The supplier decides on the production input and loan amount. A Karush-Kuhn-Tucker optimality analysis is used to characterise the properties of the retailer’s ordering and financing strategy: (1) The supplier might embezzle the CIA if the purchasing and financing contract is not well-designed; therefore, the retailer should establish some restrictions on the order price and CIA amount. (2) The retailer’s optimal decision about the quantity to purchase is independent of the financing strategy. (3) Because these schemes are interchangeable, multiple optimal financing portfolios consisting of CIA and/or PSPOF are possible. (4) The optimal dual-financing scheme maximises the retailer’s profit and integrates the S.C. Thus, the scheme can eliminate the effect of double-marginalisation. (5) As the supplier becomes more reliable, the retailer should increase the usage of PSPOF and purchasing quantity.

KEYWORDS:

• Purchasing
• inventory management
• financial management
• stochastic models
• game theory
• cash in advance
• purchase order financing

Acknowledgement

The authors gratefully acknowledge the comments of the editors and reviewers for the revision of this study, and acknowledge the financial support of the Ministry of Science and Technology of Taiwan, R.O.C. through its grants MOST 107-2410-H-005-020.

Data availability statement

The authors confirm that the data supporting the findings of this study are available within the article or its supplementary materials.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

This work was supported by Ministry of Science and Technology, Taiwan: [Grant Number MOST 107-2410-H-005-020].

Notes on contributors

Andy Wu

Andy Wu is an associate professor at the Department of Marketing in National Chung Hsing University in Taiwan (ROC.) He received a bachelor and master degree of Industrial and Information Management in National Cheng Kung University, and a PhD degree of Business Administration in National Taiwan University. He has taught purchasing strategies, management science, channel marketing, and multivariate analysis etc. to fulltime and EMBA students for several years and excel in using mathematical programming and statistical analysis to identify, describe, and solve the business problems. His current research field is with the coordination of operations and finance for supply chains which are always impacted by the various kinds of uncertainty such as demand and price, and dynamic negotiations regarding the constrained capital of supply chain entities.