The impact of insufficient cash flow on payment term and supply chain contracts

Abstract

ABSTRACT Payment term is an essential part of contract in a supply chain. We consider a supply chain with a retailer who moves first to choose one of three payment terms, e.g. ‘early payment’ (EP), ‘delayed payment’ (DP) and ‘punctual payment’ (PP) and a manufacturer who may have a preference conflict on the payment term with the retailer. Analysing with a sufficient cash flow as a benchmark, strategic impact of insufficient cash flow on payment term and supply chain contracts is investigated to mitigate the conflict. Our study shows that the retailer with cash constraint moves from EP to DP when the initial cash is very small, otherwise holds EP either by borrowing a bank loan with a large wholesale price or using up all initial cash with a small wholesale price. Moreover, a subsidy contract with large wholesale price under the retailer’s cash constraint absolutely mitigates the payment preference conflict, while the revenue-sharing contract with small wholesale price may be effective. Moreover, under the manufacturer’s cash constraint, the retailer is better off under EP, while the manufacturer prefers DP with (without) bank credit related to a small (larger) interest rate when wholesale price is small, then prefers EP as cash flow decreases. Furthermore, the revenue-sharing contract is more effective.