Supply Chain Loss Averse Newsboy Model With Capital Constraint

Abstract

The financing of supply chains involves decisions by supply chain members as well as by lending institutions. The optimality of lending decisions in this environment depends on the loss aversion on the part of supply chain members as well as the availability of capital. The purpose of this paper is to understand the impact of capital constraint and loss aversion on operational decisions in supply chains. Traditional models have the bank external to the supply chain, with the bank’s interest rate exogenous. This research concerns a capital-constrained supply chain with the manufacturer selling to a loss averse newsvendor-like retailer, and a bank financing both the manufacturer and the retailer. The existence of supply chain finance equilibrium is proven by the use of Stackelberg game analysis. The best pricing and ordering decisions of both manufacturer and retailer are determined, and results demonstrate how these key decisions are influenced by their initial capital and the bank’s financial decisions. For instance, the optimal order quantity increases or decreases with initial capital, and it is interesting that bankruptcy protection encourages a cash-constrained retailer to adopt an aggressive ordering strategy. Moreover, it is shown that the retailer’s loss aversion has a significant impact on the capital constraint problem. With an increase in loss aversion, the required initial working capital decreases. Loss aversion can even change the retailer’s situation from one of capital constraint to one of capital sufficiency. An extension with double orders is given for comparison. Numerical examples are given to demonstrate the impact of initial capital and loss aversion on the optimal decisions and some other managerial insights are discussed.