Financing and Ordering Strategies in a Supply Chain with Option Contracts

Abstract

Motivated by the development of supply chain finance and option contracts’ application in supply chain, a two-echelon supply chain where a capital constraint retailer orders via option contracts to satisfy uncertain demand is considered in this paper. To get more money for the order payment, the retailer can either apply for bank credit financing from a bank or trade credit financing from a supplier. By developing a Stackelberg game where the supplier acts as a leader, the retailer as a follower, we simultaneously analyze the supply chain's optimal ordering and financing strategies and conclude that in the presence of the retailer's bankruptcy risk, both the supplier and retailer are better off when trade credit financing is chosen. Even though the supply chain cannot be coordinated, the combination of trade credit financing and option contracts can improve its performance significantly and give the supplier a stronger control over the distribution channel, i.e., stabilize the retailer's order size, increase the order size when production cost is high and decrease the order size when the production cost is low.