Coordinating contracts for a financially constrained supply chain |
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| Affiliation: | 1. School of Management, Huazhong University of Science and Technology, Wuhan, China;2. Naveen Jindal School of Management, The University of Texas at Dallas, TX, USA;3. Business School, Hunan University, Changsha, China;1. School of Mechanical and Electrical Engineering, Wuhan Textile University, Wuhan 430073, China;2. School of Computer Science and Technology, Huazhong University of Science and Technology, Wuhan 430074, China;3. School of Management, Tianjin University, Tianjin 300072, China;1. College of Management and Economics, Tianjin University, Tianjin 300072, China;2. School of Management, University of Liverpool, Liverpool, UK;1. Department of Mathematics, Institute of Engineering & Management, Salt Lake Electronic Complex, Kolkata 700091, West Bengal, India;2. John Molson School of Business, Department of Decision Sciences and MIS, Concordia University, Canada H3G1M8;1. School of Business Administration, Hunan University, Changsha, Hunan 410082, PR China;2. Faculty of Business and Economics, University of Melbourne, Melbourne, Victoria 3010, Australia;1. Business School, Central University of Finance and Economics, Beijing, China;2. China Center for Internet Economic Research, Central University of Finance and Economics, China;3. School of Finance, Central University of Finance and Economics, Beijing, China |
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| Abstract: | We consider a financially constrained supply chain in which a supplier (leader) sells products to a retailer (follower) who has no access to bank financing due to her low credit rating. However, the supplier can borrow from a bank and offer trade credit to the retailer to alleviate her financial constraint. Failure to pay off a bank loan or trade credit incurs a variable default cost. We analyze the centralized version of the supply chain to obtain new coordination requirements. We then examine whether revenue-sharing, buyback, and all-unit quantity discount contracts can coordinate our supply chain. We show that the all-unit quantity discount contract fails to coordinate. However, the revenue-sharing and buyback contracts can coordinate the supply chain, but only when the supply chain has a sufficient total working capital. Moreover, they cannot allocate profit flexibly unless the supplier has a large enough working capital. Finally, we design a generalized revenue-sharing contract that coordinates the supply chain with flexible profit allocation, and also show by numerical examples its superiority over the revenue-sharing and buyback contracts. |
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| Keywords: | Supply chain coordination Financial constraints Trade credit Default cost Generalized revenue-sharing contract |
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