Role of financial leasing in a capital-constrained service supply chain

Abstract

Financial leasing (FL) has become a common solution to financing problems encountered by firms. The main difference between FL and some conventional supply chain financing strategies is the separation of ownership and the right of use of the equipment/products. This paper studies a service supply chain that consists of a capital-constrained downstream firm that provides service to consumers and an upstream firm that manufactures the equipment needed during the service process. The downstream firm has three alternative financing solutions, including FL, bank credit financing (BCF), and trade credit financing (TCF). In this study, game theoretical models are constructed to analyze and compare the optimal prices, order quantities, and profits in different financing scenarios. Results corroborate that FL outperforms other conventional financing strategies when the profitability of service provision is low or the premium revenue of the FL firm due to its better utilization of the equipment is relatively high. Moreover, the preference of the downstream firm on alternative financing models might not be exactly consistent with that of the upstream firm or the supply chain system. Under some conditions, the downstream firm prefers TCF to other strategies, while the upstream firm and the supply chain system is better off under FL. Furthermore, we extend our research to some general situations, e.g., endogenous interest rate in BCF, positive quantity of equipment endowed with the downstream firm, and integrated union of the upstream firm and the FL firm. Most of the results derived in the basic model can be further applied in most of the general situations.