Financing equilibrium in a three-echelon supply chain: the impact of a limited bank loan

Abstract

ABSTRACT This paper studies a three-echelon supply chain consisting of a commercial bank, a supplier and a capital constrained retailer. The newsvendor-like retailer may not borrow up to what she needs from the bank due to low credit rating, and the remaining part may resort to the upstream supplier. Under the hybrid financing scheme under combination of bank credit and trade credit (BT), we characterize the optimal loan ratio for the commercial bank, the optimal wholesale price for the supplier and the optimal order quantity for the retailer, respectively. We investigate the impact of the bank loan ratio on the participants’ optimal decisions and profits. Comparing with the cases of no financing (NF) and bank credit financing only (BF), we determine financing preferences of the supplier and the retailer. Furthermore, we find that there exists a Pareto improvement region, where both the supplier and the retailer tend to accept BF or BT so that both participants can be better off in contrast to NF.