A Mutual-Aid Mechanism for Supply Chains with Capital Constraints
17 Pages Posted: 12 Nov 2016
Date Written: June 6, 2016
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
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