Optimal Decisions in Fresh-Product Supply Chain with Random Production Yield: No Financing Vs Bank Financing

Abstract

AbstractConsidering a fresh-product supply chain with a dominant retailer and a supplier with limited capital, we construct a Stackelberg game model under two financing modes where the supplier either has no financing or has bank financing opportunity. Since the supplier has random yield, she has to determine the production quantity after knowing the retailer’s ordering. We show the supplier’s optimal production decision as well as the retailer’s ordering decision analytically, and discuss the expected profits of each member within the supply chain numerically. We show analytically that there exists a constant ratio in terms of the retailer’s order quantity to the supplier’s production level in both modes. Compared with no financing mode, the retailer under bank financing will increase his ordering. We find from numerical study that, as the random yield factor increases, the retailer’s expected profit will decrease. Regardless of the variation of random yield, the supplier’s expected profit without capital constraint is higher than that under bank financing because of the bank loan cost. As bank financing is more costly for supplier, which may lead to lower production quantity, the “smart” retailer will increase its own order quantity to encourage suppliers to produce more.KeywordsRandom yieldFresh-product supply chainNo financingBank financing