Research On Supply Chain Internal Financing Strategies For Members With Capital Constraints

Capital constraints affect the profitability and competitiveness of the whole supply chain system and its members. As an effective means to ease the capital pressure for supply chain members, internal financing inside the supply chain system has been widely used in practice. Internal financing inside the supply chain system refers to a financing mode in which the capital-adequate members of a supply chain infuse capital into the capital-constrained members through advance payments or delay in payments. Compared with external financing mode wherein banks are borrowers, internal fiancing does not need additional assets as collateral. Furthermore, the lenders have better information(e.g. production cost, market demand etc.) about the borrowers. Thus, it has an important theoretical meaning and practical value to study how internal financing inside the supply chain would play a role in solving problems faced by capital-constrained enterprises.We first study the case when suppliers face capital constraints. In this case, the downstream retailers provide financing to suppliers by offering advance payment. We then analyze the situation when retailers face capital constraints and the upstream suppliers provide financing to retailers by delay in payment. In addition, externalization of internal financing for members inside the supply chain system is studied. There are seven chapters in this dissertation. The first chapter introduces the background, the main contents and innovation points of this dissertation. Chapter 2 provides the literature review about the existing studies of internal financing, external financing, the comparison between internal financing and external financing in the supply chain system.In Chapter 3, we study a supply chain consisting with a single supplier and a retailer. The supplier faces capital constraints and the retailer provides financing to the supplier by offering advance payments. We analyze the retailer’s optimal financing decision, the supplier’s optimal production decision and the conditions that the retailer can induce the supplier’s production to the optimal level without capital constraints. We study the impact of preorder price discount on the advance payment. It is shown that when the wholesale price is exogenous and falls in a certain range, the supplier will offer price discount to attract the retailer’s advance payment even if the supplier has ample capital. When the supplier has capital constraint, the supplier would accept the advance payment financing if and only if his initial capital is smaller than a threshold value. In addition, we showed that there exists a threshold value for a given price discount rate. When the price discount rate is higher than the threshold value, the advance payment financing can boost the supplier’s production to exceed the classical level without capital constraint and advance payment. It is also shown that when the demand is highly elastic with respect to price and if the supplier accepts the financing contract, the optimal production quantity is equal to the level without capital constraint; otherwise, only if both the price discount rate and the supplier’s initial capital are high, the optimal production without capital constraint can be restored.We then study the situation when the wholesale price is endogenous. We analyze two cases: the supplier is the supply chain leader and the retailer is the supply chain leader. It is shown when the supplier is the leader of the supply chain, he will transfer part of his profit to the retailer in order to attract the retailer’s advance payment, and set the wholesale price of secondary purchases as the market price; when the retailer is the leader of the supply chain, the advance payment financing can boost the supplier’s production to exceed the level without capital constraint if the supplier has low initial capital. Finally, when the demand is dependent on the selling price, we study the retailer’s optimal decision between providing advance payment and raising the selling price. It is shown that when the supplier has low initial capital, the retailer will raise the product’s selling price as high as possible to reduce the negative impact of the supplier’s capital constraint on his profit.In Chapter 4, with two suppliers facing capital constraints in the assembly system, we study the impact of the suppliers’ complementarities on the assembler advance payment financing efficiency and the members’ performances. It is shown that when the wholesale prices are exogenous, the optimal productions without capital constraints are restored by the assembler’s advance payment financing only if both suppliers have more initial capitals in the assembly system than that in the supply chain with one supplier. It is also shown that the assembler’s optimal advance payment to one supplier is decreasing in the supplier’s own initial capital, but is increasing in the other supplier’s initial capital. The suppliers’ optimal production quantities increase in both suppliers’ initial capital. Interestingly, we found that whereas the assembler, the other supplier and the whole supply chain will benefit if the capital status of one supplier, who receives financing from the assembler, improves, but it does not always benefit the supplier himself. In particular, when the optimal production without capital constraints is restored, the profit of the supplier, who receives financing from the assembler by advance payment, is decreasing in his initial capital.We extended our analysis to consider the case when the wholesale price(set by the assembler) is endogenous. It is shown that, when at least one supplier has a sufficiently low capital, the assembler’s advance payment financing can boost production quantity to exceed the level without capital constraints. When there exist external substitute suppliers, it is shown that the assembler’s financing decisions to each supplier are independent, and it is also shown that capital-constrained suppliers need more initial capital to restore the optimal production without capital constraints comparing with that when there do not exist external suppliers.In Chapter 5, with the retailer facing capital constraints, we analyze the retailer’s optimal ordering quantity and the supplier’s optimal strategy to provide the delay in payment. We also study the impact of financing strategy on the supply chain performance. It is shown that the retailer’s optimal ordering quantity under the delay in payment is larger than that without capital constraint. That is, over-ordering happens. In order to reduce the adverse effects of over-ordering on his profit, the supplier should set a limit of delay in payment. There exists a critical value such that the limit works only when the retailer’s initial capital is lower than the critical value.We further assume the supplier is risk-averse and study the incentive effect of credit insurance on the supplier optimal financing decisions. It is shown that the optimal delay quantity provided by the supplier to the capital constrained retailer under insurance policy is larger than that without insurance policy, and the optimal delay quantity that the supplier gives the retailer under co-insurance policy is increasing in the proportion covered by insurance company. Besides, when the supplier risk-averse degree is high, his optimal choice is to buy a full insurance policy. When his risk-averse degree is lower, however, his optimal choice is to buy a co-insurance policy and asks for a lower coverage proportion.In Chapter 6, we study the externalization of internal financing for members inside the supply chain system. That is, the bank provides financing to the capital-constrained member under the core supply chain member’s guarantee. The bank is assumed to be risk-averse and we study two supply chain financing modes: the core supply chain member provides part guarantee: purchase order financing for the capital-constrained supplier; the supplier buy-back guarantee financing for the capital-constrained retailer. It is shown that risk limit equals to loan limit for the bank to control credit risk, while the retailer’s preorder pledge and the supplier’s buy back guarantee can encourage the bank to increase the loan limit. Because the retailer has two incentives to offer preorders and the supplier also has two incentives to offer buy back: one is influencing the partner’s operation decision and the other is enhancing the loan limit, the core enterprise should balance the shortage risk and financing risk to choose the optimal decision at the appropriate time.In Chapter 7, we discuss the conclusions and future research directions of this dissertation.The innovation points of this dissertation are summarized as follows.(1) We put forward a kind of new supply chain internal financing mode for capital-constrained suppliers, reveal the financing function of preordering. We further analyze the impacts of the substitution and complementary effects of multiple capital-constrained suppliers on the efficiency of supply chain internal financing.Traditional researches focus on supply chain internal financing for retailers. However, there are many cases that suppliers face capital constraints. The capital constraints at suppliers can lead to supply shortage faced by the downstream members. The study of how to use the downstream members’ advance payment to solve the suppliers’ capital constraints problem is one of the innovation points of this paper. We showed that the advance payment financing can improve the supply chain performance, but an improved capital status at the supplier can hurt the profit of the particular supplier himself. Thus, the supplier has an incentive to hide the true information about his initial capital, the retailer must guard against the supplier’s moral hazard when providing advance payment. This conclusion not only puts forward the method of solving the supplier’s capital constraint, but also points out the matters needing attention. This is helpful for guiding the applications in practice.(2) We consider the externalization of internal financing for members inside the supply chain. We design the mixing mechanism of internal financing and external financing of supply chain, and put forward the strategies of risk sharing among the supply chain’s core member, capital-constrained member and the bank. It contributes the existing researches that consider internal financing and external financing separately.This dissertation studies the externalization of internal financing for members inside the supply chain system. When banks control credit risk through setting loan limit, the credit risk can be reduced and the loan limit can be enhanced by the core enterprises providing guarantee. This is actually a mixed financing mode of internal financing and external financing. In the externalization of internal financing for members inside the supply chain system, internal abilities of bearing risks and external capitals can be fully made use of to solve the members’ capital constraint problem in the supply chain. This is a new financing mode.(3) We put forward the risk control strategies based on internal guarantee and external diversion and reveal the incentive effects of credit insurance, the retailer’s preorder pledge and the supplier’s buy back guarantee on the supply chain financing. It fills the gap that traditional researches about supply chain financing do not consider the impacts of risk tolerance degrees and risk control strategies on financing decisions.In practice, the members and the banks who provide financing are often risk-averse. Considering the impact of risk tolerance degrees on financing and operation decisions and the risk control strategies is one of the innovation points of this paper. In this dissertation, we reveal the incentive effect of credit insurance on the risk-averse supplier providing financing for capital-constrained retailer by the delay in payment, the retailer’s preorder pledge on the risk-averse bank providing financing for capital-constrained supplier and the supplier’s buy back guarantee on the risk-averse bank providing financing for capital-constrained retailer.