How to finance the supply chain when you are small? Clearance sale and loan payment timing in financially constrained supply chains

Abstract

Before inventory can be put into shelves at a retailer, it needs to be produced, which takes time. During this time traditionally the supplier had to cover the money bound in inventory, but new paradigms, such as supply chain finance, change who pays for work-in-process inventory. While this opens new possibilities for smaller, financially constrained suppliers, it puts additional financial pressure on the retailers. So, it may exclude smaller retailers, which are also cash constrained. If demand fluctuates then they may even have to recur to clearance sales to repay the loan. This study provides guidance to these small retailers on which clearance sale strategy to adopt, and when to repay their loans, investigating the interaction between both decisions using Stackelberg game framework in a dyadic supply chain where the supplier is the Stackelberg leader. It considers multiple bank interest rates and contract types chosen by the supplier. Results show that the retailer’s optimal order quantity decreases by adopting a limited clearance sale model for leftover disposal if it pays its loan immediately after the normal selling season. If it decides on loan payment after clearance sale, its optimal order quantity is not influenced by the clearance sale strategy, and we further demonstrate that the retailer’s optimal order quantity, loan payment timing, and expected profit are influenced by the supplier’s chosen contract. We find that buyback (BB) and revenue sharing (RS) contracts coordinate the supply chain only if the retailer resorts to a bank loan for inventory procurement.