Optimal decisions and coordination strategy of a capital-constrained supply chain under customer return and supplier subsidy

Abstract

PurposeThe purpose of the paper is to explore impacts of financing and supplier subsidy on capital-constrained retailer and the value of returns subsidy contract under a situation where the retailer makes joint operations and finance decisions.Design/methodology/approachThis paper considers a two-level supply chain, including a retailer and a supplier. Facing problems of capital constraints and even customer returns, the newsvendor-like retailer orders from a well-capitalized supplier. The supplier allows the retailer a delay in payment and provides a subsidy contract to alleviate its problems if it is profitable. Considering their difference of initial capital status, the retailer is assumed to be Follower of Stackelberg Game and the supplier is the Leader.FindingsThe supplier return subsidy contract has some merits for both of partners in the chain. And it does not coordinate the supply chain when the retailer has enough initial capital; however, when the retailer is capital constrained, it does. In addition, the retailer’s initial capital level significantly affects the supplier’s subsidy decision.Research limitations/implicationsReturn rate is simplified to a fixed proportion of completed demand. In addition, trade credit is only financing source in this paper, and other types of financing methods, such as bank credit, can be taken too.Originality/valueThis paper first incorporates trade credit financing and customer returns into a modeling framework to investigate the capital-constrained retailer’s joint operations and finance decisions and the value of supplier’s subsidy contract.