Blockchain-Enabled Deep-Tier Supply Chain Finance

Manufacturing & Service Operations Management (Forthcoming)

48 Pages Posted: 18 Feb 2021 Last revised: 23 May 2022

See all articles by Lingxiu Dong

Lingxiu Dong

Washington University in St. Louis - John M. Olin Business School

Yunzhe Qiu

Washington University in Saint Louis, John M. Olin Business School, Students

Fasheng Xu

Syracuse University - Whitman School of Management

Date Written: February 1, 2021

Abstract

Problem Definition: For many supply chains, deep-tier suppliers, due to their small sizes and lack of access to capital, are most vulnerable to disruptions. We study the use of advance payment (AP) as a financing instrument in a multitier supply chain to mitigate the supply disruption risk in a traditional system (with limited visibility) and a blockchain-enabled system (with perfect visibility). The main goal of this paper is to shed light on how blockchain adoption impacts agents’ operational and financial decisions as well as profit levels in a multitier supply chain. Academic/Practical Relevance: Traditionally, because of the limited visibility in the deep-tiers, powerful downstream manufacturers’ financing schemes offered to their immediate upstream suppliers are not effective in instilling capital into the deep-tiers. Advancements in blockchain technology improve the supply chain visibility and enable the manufacturer to better devise deep-tier financing to improve supply chain resilience. Methodology: We develop a three-tier supply chain model and take a game-theoretic approach to compare how blockchain-enabled deep-tier financing schemes affect a financially constrained supply chain’s optimal risk-mitigation and financial strategies. Results: We find that although improved visibility via blockchain adoption can help the manufacturer make informed supply chain financing decision, whether it can benefit all supply chain members depends on the financing schemes in use. Blockchain-enabled delegate financing increases risk-mitigation investments and benefits all three tiers of the supply chain only when the tier-2 supplier is severely capital-constrained with the working capital below a threshold. Because delegate financing endows the intermediary tier-1 supplier with a leverage over the manufacturer, the inefficiency inhibits an all-win outcome when the tier-2 supplier is not severely capital-constrained. Blockchain-enabled cross-tier direct financing exhibits a compelling performance as it always leads to win-win-win outcomes (and thus ubiquitously implementable) regardless of the suppliers’ working capital profile. Managerial Implications: Our insights help firms assess opportunities and challenges associated with enhancing supply chain visibility via blockchain adoption.

Keywords: Supply chain finance, blockchain, deep-tier financing, supply chain visibility, supply disruption, advance payment, technology adoption

Suggested Citation

Dong, Lingxiu and Qiu, Yunzhe and Xu, Fasheng, Blockchain-Enabled Deep-Tier Supply Chain Finance (February 1, 2021). Manufacturing & Service Operations Management (Forthcoming), Available at SSRN: https://ssrn.com/abstract=3776953 or http://dx.doi.org/10.2139/ssrn.3776953

Lingxiu Dong

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1156
St. Louis, MO 63130-4899
United States

Yunzhe Qiu

Washington University in Saint Louis, John M. Olin Business School, Students ( email )

St. Louis, MO
United States

Fasheng Xu (Contact Author)

Syracuse University - Whitman School of Management ( email )

721 University Avenue
Syracuse, NY 13244-2130
United States

HOME PAGE: http://www.fashengxu.com

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