Coddle the Manufacturer or the Retailer: Government Loan Policy for Cash-Constrained Supply Chains

Abstract

Problem Definition: MSMEs (Micro, Small and Medium Enterprises) play a crucial role in the economic development of many developing countries (e.g., India), albeit facing a number of challenges that limit their growth and success. One crucial challenge is the lack of access to affordable financing programs. A common policy intervention is to offer affordable government loans to those poor or small-scale players, which might cover either one or both tiers of the supply chain. Motivated by the Indian example, this paper investigates two types of government loan policies, one in which the government loan is only offered to the upstream manufacturer (referred to as the traditional loan policy) and the other in which both the manufacturer and the retailer are eligible to access the loan (referred to as the new loan policy).

Methodology/Results: We develop a game-theoretic model to fully characterize the market equilibria under the two types of government loan policies, and examine the impact of the loan policy change on cash-constrained supply chain operations and profits. Our research yields the following main insights. First, the loan policy change never hurts the upstream manufacturer’s profit. When the government loan budget is relatively large, the manufacturer is even better off under the new loan policy, as the manufacturer no longer loses the wholesale profit due to the retailer’s bankruptcy. Second, counterintuitively, the downstream retailer is hurt by the government loan inclusion when the loan budget is moderate due to the manufacturer’s strategic cancellation of trade credit and rise in wholesale price. Third, the loan policy change could escalate the government deficit and hurt the supply chain profit (even the social welfare). Finally, in terms of the supply chain benefit, offering the government loan exclusively to the retailer can sometimes be superior to the existing traditional and new loan policies.

Managerial Implication: The manufacturer’s concerns about the government loan policy change should be dispelled because our analysis suggests that the expansion of loan scope always benefits the manufacturer. Overall, our results underscore that government loan policy design must carefully account for the strategic responses (both operational and financial actions) of supply chain players to the policy change, in order to achieve positive societal outcomes.

Keywords: Cash-constrained supply chain, government loan, trade credit, bank financing, policy design