Blockchain-Enabled Deep-Tier Supply Chain Finance

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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. In this paper, we study the use of advance payment (AP) as a financing instrument in a multitier supply chain to mitigate the supply disruption risk and compare the traditional system (deep-tier financing with limited visibility) with the blockchain-enabled system (financing 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 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 understand a financially constrained supply chain's optimal operational and financial strategies. Results: We find that the improved supply chain visibility (by blockchain adoption) always benefits the manufacturer by enabling her to induce the desired operational risk-mitigation investment from the tier-1 and tier-2 suppliers. However, depending on the directional change in the operational risk-mitigation investment, which depends on the suppliers' initial wealth levels, the tier-1 and tier-2 suppliers can be worse-off. The "win-win-win" outcome takes place only when all operational risk-mitigation measures increase, that is, when the tier-1 supplier is severely capital constrained but the tier-2 supplier is moderately capital constrained. Comparing the two types of blockchain-enabled deep-tier financing schemes, adjacent-tier delegated financing versus cross-tier direct financing, the manufacturer strictly prefers the latter. In contrast, the tier-1 supplier strictly prefers the former because the former endows the tier-1 with financial leverage over the manufacturer. The tier-2 supplier prefers the latter only when the emergency source is expensive. 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

Suggested Citation

Dong, Lingxiu and Qiu, Yunzhe and Xu, Fasheng, Blockchain-Enabled Deep-Tier Supply Chain Finance (February 1, 2021). Available at SSRN: https://ssrn.com/abstract=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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