A Mutual-Aid Mechanism for Supply Chains with Capital Constraints

17 Pages Posted: 12 Nov 2016

See all articles by Hongjun Peng

Hongjun Peng

Nanjing Forestry University

Tao Pang

North Carolina State University

Fuliang Cao

Nanjing Forestry University

Date Written: June 6, 2016

Abstract

We consider a supply chain in which both the supplier and the distributor experience capital constraints. Due to the capital constraints, the supplier will face a capital deficit during the production period and the distributor will face a capital deficit during the sales periods. Those deficits are typically financed by bank loans. Under the bank loan financing case, we derive the optimal strategies for both the suppliers and the distributors. Then we propose a mutual-aid mechanism under which the distributor provides an advance payment to the supplier during the production period, while the supplier offers a deferred payment trade credit to the distributor in the sales period. Since the demand is uncertain, there is a bankruptcy risk with the distributor due to the low demand. Therefore, the interest rates will be adjusted to reflect the risk. We build a Stackelberg game model to derive the optimal strategies under the mutual-aid mechanism. Our results indicate that under the mutual-aid mechanism, the ordering quantity from the distributor is always higher than that of the bank loan financing case. Further, we prove that the mutual-aid mechanism can make both the supplier and the distributor to gain more profits comparing to the bank loan financing case.

Keywords: Supply chain, Mutual-aid trade credit, Advance payment, Deferred payment

JEL Classification: C44, M11

Suggested Citation

Peng, Hongjun and Pang, Tao and Cao, Fuliang, A Mutual-Aid Mechanism for Supply Chains with Capital Constraints (June 6, 2016). Available at SSRN: https://ssrn.com/abstract=2862629 or http://dx.doi.org/10.2139/ssrn.2862629

Hongjun Peng

Nanjing Forestry University ( email )

159 Longpan Rd
Nanjing, Jiangsu Sheng 210037
China

Tao Pang (Contact Author)

North Carolina State University ( email )

Hillsborough Street
Raleigh, NC 27695
United States

Fuliang Cao

Nanjing Forestry University ( email )

159 Longpan Rd
Nanjing Shi, Jiangsu Sheng
China

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