Revenue Sharing Contract Coordination With Buyer-backed Purchase Order Financing

SMEs take a very important position in China's economy development,however,due to their own deficiencies and high financing barrier of financial institutions,they face financing difficulties frequently.As a result,various supply chains consisted of those SMEs are often disrupted by financial problems.Large retailers take many methods to avoid such problems.Buyer-backed purchase order financing is one of those methods that appears in the market in the recent years.In buyer-backed purchase order financing,when the supplier faced with financial dilemma is unable to fulfill the retailer's order,the retailer can initiate BPOF with financial institutions based on its owncredit.After a comprehensive evaluation on the retailer's credit level and previous performances,the financial institution grants a loan no more than the value of order at a certain interest rate to the supplier.The supplier begins production upon receiving the loan and deliver the products to the retailer.After the demand is realized,the retailer pays the supplier through the financial institution,which gives the payment for goods to the supplier after taking away the principal and interest of the loan.If the financial institution cannot get all its required return on the loan,the retailer promises to cover a percentage of its loss as a guarantee for the loan.The financial disruption of supply chain is thus prevented.In a supply chain with revenue sharing contract,the retailer share a percentage of sales revenue to its supplier according to contract terms.In BPOF,both parties make decisions on their own benefit,which leads to the inefficiency of the whole supply chain decision because of double marginalization.So it is important to study supply chain coordination in this context.This paper chooses revenue sharing contract to coordinate the supply chain.Previous research has proved that revenue sharing contract can coordinate a supply chain with ample capital.However,when buyer-backed purchase order financing(BPOF)is implemented in a capital constraint supply chain,whether the contract is still able to coordinate the supply chain remains a question.This paper aims to expand the literature on supply chain coordination and supply chain finance and provide useful application guidance to future retailers by studying whether revenue sharing contract can still coordinate the supply chain after the application of BPOF.The innovative part of this paper is:1)In terms of supply chain finance,a novel way of financing—BPOF is discussed.The current literature is quite limited in this aspect.It focuses on retailer's procuring decision under BPOF,while this paper mainly focuses on supply chain coordination.2)In terms of parameter setting,I dropped the assumption that the advance rate is 100%in the previous literature,and set the rate to be between 0-100%,which is more consistent with the real situation.3)In terms of revenue sharing contract,this paper takes financial constraint into consideration and discusses the adaptability of revenue sharing contract and new financing method.The conclusions of the paper are as follow:1)Revenue sharing contract can still coordinate the supply chain which alleviates financial stress through BPOF in most cases.But when the retailer does not afford actual guarantee cost,and the loan is not enough for the supplier,the contract cannot coordinate the supply chain effectively due to the inability of retailer to earn a positive profit.2)BPOF relieve the financial stress at the expanse of retailer's freedom in deciding product price.The product price is internalized in the decision process,much unlike the traditional setting where only wholesale price is internalized.3)When the retailer afford the actual guarantee cost,the guarantee rate is negatively related to the wholesale price and positively related to the product price.When the retailer does not afford the actual guarantee cost,the guarantee rate is not related to the price.The revenue sharing rate is positively related to wholesale price.It is not related to product price.