The value of backup supply for mitigating disruption risk with equity finance

Abstract

Based on the policy incentives for equity financing and firms' awareness of managing supply disruption risk, this paper examines a two-tier supply chain. A large manufacturer can purchase products either from a capital-constrained unreliable supplier who has disruption risk or a reliable backup supplier with a higher cost. We investigate the value and interactive use of the backup supplier and equity financing on firms' performances. The results show both the backup supplier and equity financing alone can always benefit the manufacturer, but the unreliable supplier can become worse off. However, when the backup supplier and equity financing interact, their impact changes dramatically. Under equity financing, the backup supplier can make the unreliable supplier better, and the effect of the backup supplier on disruption risk management differs with different wholesale prices. Moreover, with a backup supplier, equity financing can benefit both the manufacturer and the unreliable supplier. Specifically, with the backup supplier, the unreliable supplier can lose all autonomy on whether or not to raise equity financing. Then, the manufacturer and unreliable supplier can achieve Pareto optimality due to ‘bidirectional free riding’. These insights provide strategic guidance for product ordering, enabling firms to manage disruption risk better and achieve high profitability.

Keywords:

• Supply chain management
• disruption risk management
• backup supply
• financial constraint
• equity finance

Disclosure statement

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

Data availability statement

Data sharing is not applicable to this article as no new data were created or analysed in this study.

Notes

1 https://www.mckinsey.com/capabilities/operations/our-insights/risk-resilience-and-rebalancing-in-global-value-chains.

2 https://www.resilinc.com/press-release/supply-chain-disruptions-up-88-in-2021-with-factory-fires-taking-top-spot-contributing-to-record-breaking-supply-shortages/.

3 https://www.doc88.com/p-91899447318120.html.

4 https://www.pishu.com.cn/skwx_ps/bookDetail?SiteID=14&ID=13467203.

5 http://sscp.cssn.cn/xkpd/pl_20172/202005/t20200527_5134806.html.

6 https://www.investopedia.com/ask/answers/042215/what-are-benefits-company-using-equity-financing-vs-debt-financing.asp.

7 https://nai500.com/blog/2018/10/lithium-producer-livent-falls-3-6-percent-in-market-debut/.

8 https://www.apluscap.com/news/570.html.

9 https://www.gov.cn/xinwen/2021-03/13/content_5592681.htm.

10 https://www.gov.cn/govweb/zhengce/202306/content_6887924.htm.

11 http://www.xinhuanet.com/money/20230101/d6a457a6100d4c0ba27e3174486d19b8/c.html.

12 https://www.cls.cn/detail/1334764.

Additional information

Funding

Shuhua Zhang is the corresponding author and all authors contributed equally to this work. This project was supported in part by the National Natural Science Foundation of China (72102163, 11771322, 12271395), the Humanities and Social Science Research Programme of the Ministry of Education of China (22YJAZH156), the Innovation Team Project for Ordinary University in Guangdong Province (2023WCXTD022) and the Statistical Science Research in Tianjin, China (TJ2023KY02).

Notes on contributors

Jiajing Li

Jiajing Li is a Ph.D. student in Management Science and Engineering, Tianjin University of Finance and Economics, China. Her research interests include supply chain finance, risk management etc. Her papers have been appeared in Transportation Research Part E: Logistics and Transportation Review etc.

Shuhua Zhang

Shuhua Zhang is a professor at the Coordinated Innovation Center for Computable Modeling in Management Science, Tianjin University of Finance and Economics, China. He received his Ph.D. in Computational Mathematics from the Institute of System Sciences, Chinese Academy of Sciences. His research interests include financial mathematics, numerical solution of partial differential equations etc. His papers have appeared in the European Journal of Operations Research, Transportation Research Part E: Logistics and Transportation Review, Journal of Cleaner Production etc.

Pengwen Hou

Pengwen Hou is an associate professor at the Coordinated Innovation Center for Computable Modeling in Management Science, Tianjin University of Finance and Economics, China. He received his Ph.D. in Management Science and Engineering from the Department of Operation Management, Tianjin University, China. He has been a visiting Ph.D. at Ivey Business School, Western University, Canada. His research interests include electronic commerce, supply chain management etc. His papers have appeared in Production and Operations Management, European Journal of Operational Research, International Journal of Production Research etc.