Optimal production decision and financing strategy for a capital-constrained closed loop supply chain under fairness concern

Abstract

This paper considers a capital-constrained closed-loop supply chain (CLSC) composed of one original equipment manufacturer (OEM) and a single remanufacturer (RM), and investigates this CLSC's optimal production and financing strategy under fairness concerns. CLSC decision-making models under four cases, namely, the OEM has adequate funds, the OEM's funds are limited without financing, the OEM has limited funds with debt financing, and the OEM's funds are limited with advance payment financing, are formulated. The equilibrium solutions in different cases are obtained through the backward induction method, the impact of fairness concern behavior on the equilibrium solutions are analyzed, and the critical conditions for OEM to adopt optimal financing strategies are obtained. The results show that: compared with the advance payment financing, the yield of new product under the debt financing situation is higher, but the yield of remanufacturing products is lower, and the sales prices of both products are higher; furthermore, the fairness concern have a smaller marginal impact on the quantities of new products, but have a larger marginal impact on the quantities of remanufactured products. Moreover, only if the OEM's initial capital is constrained and the advance payment financing ratio is below a certain threshold, the OEM will adopt advance payment financing, and when the initial capital is exceedingly scarce and the advance payment financing rate is relatively large, the manufacturer tends to adopt debt financing; with financing, the environmental impact will increase as the fairness concern grows up, while with debt financing it is even more eco-friendlier.