Financing the retailer capital‐constrained supply chain with consideration of product quality and demand uncertainty

Abstract

Abstract A two‐echelon supply chain with a capital‐constrained retailer is investigated where uncertain demand and defective products are considered. As an intermediate between the retailer and the bank, the supplier provides a credit guarantee for the retailer. Two credit guarantee schemes are proposed, guarantee for quality and guarantee for both quality and sales (GQS). The partners' optimal decisions under different schemes are derived via Stackelberg game. As a critical influential factor to determine the financing cost, the loan interest rate is carefully examined with respect to its effect on the strategies of both partners. Furthermore, the influence of loss aversion on the participants' decisions is examined. Based on the theoretical analysis and numerical experiments, the following conclusions are drawn. First, the retailer's optimal order quantity is independent of the supplier's decision on the technology level, whereas the supplier's optimal decision is affected by the retailer's order size. Second, financing is not always attractive to the retailer, and is adopted only with a reasonably lower loan interest rate. Third, the GQS scheme is a win–win strategy for the supply chain if the loan interest rate is relatively high. Finally, the loss‐averse strategy is more robust for the retailer when the demand is volatile and unpredictable.

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