Optimal Procurement Strategy for Supply Chain with Trade Credit and Backorder under CVaR Criterion

Gaoke Wu,Bo Feng,Libin Guo

doi:10.3390/su131810201

Abstract

Some capital-constrained and risk-averse retailers may unable to obtain financing from banks due to insufficient collateral and high loan costs, so some retailers tend to use trade credit financing to ease their financial pressure. For the two echelon supply chain composed of a well-funded supplier and a capital-constrained retailer with risk-averse preference, a trade credit strategy model with the supplier-led is established in this paper. By analyzing both parties’ benefits, we derive the model solution and provide optimal decisions to all petitioners. The results obtained in this paper show that the optimum order quantity under the Conditional Value-at-Risk (CVaR) criterion declines w.r.t. the confidence level, and the wholesale price of the supplier increases w.r.t. the confidence level. The reason is that when the retailer makes fewer orders, the supplier will correspondingly increase the wholesale price to maximize their profit. On the other hand, the ordering policy with allowing backorder will make the retailer place fewer orders. Finally, the proposed model is indicated by the given numerical experiments.

Highlights

Many enterprises face fundamental problems affecting decision-making, such as high operation risk, supply shortage, financial constraints, and so on
The retailer would determine their ordering quantity according to their initial funds, and the wholesale price and the trade credit strategy provided by the supplier
This paper investigates the optimal strategy for supply chain with trade credit and backorder under Conditional Value-at-Risk (CVaR) criterion

Summary

Introduction

Many enterprises face fundamental problems affecting decision-making, such as high operation risk, supply shortage, financial constraints, and so on. In this paper, we will consider the two-echelon supply chain with trade credit under the CVaR criterion by providing the optimal policy of both parties when the retailer is capital-constrained and risk-averse, analyzing the affect of the retailer’s risk aversion on the decision of both parties and the impact on the retailer’s order quantity with backorder. To this end, a two-echelon supply chain comprising a well-funded supplier as well as a capital-constrained retailer with risk-averse preference is established.

Problem Description and Notation

The Model of Supply Chain with Trade Credit

Numerical Experiments

Findings

Conclusions