Financing a risk‐averse manufacturer in a pull contract: early payment versus retailer investment

Abstract

AbstractThis work focuses on a two‐level supply chain with a pull contract, where the retailer acts as a leader and the capital‐constrained manufacturer as a follower who undertakes the inventory risk. In the presence of demand uncertainty, the manufacturer is risk‐averse, and the risk is measured by the semideviation method. To finance the capital‐constrained manufacturer, we investigate two collaborative supply chain finance schemes: retailer's early payment (EP) financing and retailer investment (RI) financing. We characterize the manufacturer's optimal production quantity and the retailer's wholesale price under EP and RI. Under the two financing schemes, the manufacturer obtains a higher utility when his risk aversion degree is moderate, while the retailer is worse off in the presence of a higher risk aversion degree. Under RI, both optimal production quantity and wholesale price decrease in the proportion of dividends shared by the manufacturer. For the manufacturer (or the retailer or the total supply chain), we derive the associated parameter region in which RI achieves a higher performance than EP. When RI and EP are available, there exists a common parameter region in which RI is preferred by the manufacturer, retailer, and total supply chain.