Financing and ordering strategies for a supply chain under the option contract

Abstract

We study a two-echelon supply chain consisting of a capital-constrained retailer ordering via the option contract to satisfy uncertain demand from a single supplier. The retailer can apply for either a bank loan or trade credit from the supplier whenever necessary. In addition to economic revenue, the supplier has a relationship concern and takes the retailer's revenue into consideration. By developing a Stackelberg game, we analyze the ordering and financing problems in the supply chain. The results show that in the presence of the retailer's bankruptcy risk, the supplier should always finance the retailer at the risk-free interest rate. Given the supplier's offer, the retailer will always prefer to raise money from the supplier due to the lower interest rate. Meanwhile, under trade credit, the supply chain's efficiency is improved when the production cost is high but decreased when the production cost is low. Furthermore, our results show that the supplier's relationship concern can improve the supply chain's efficiency and the retailer's revenue most of the time, but increase the retailer's bankruptcy risk when the production cost is high, implying that the supplier's attempt to help the retailer eventually harms its long-run survival.