Production and Financing Strategies of a Distribution Channel under Random Yield and Random Demand

Abstract

This study considers a distribution channel consisting of a manufacturer with capital constraint and uncertain yield and a retailer that faces random demand. To maintain production, the manufacturer can either (1) avail bank credit financing from a perfectly competitive market or (2) request advance payment from the retailer. First, we establish two Stackelberg game models under bank credit financing (BCF) and advance payment mechanism (APM). By comparing the equilibrium strategies of the two financing models and the optimal profits of channel members, we conclude that APM is more advantageous than BCF in terms of improving channel performance. Second, we design a revenue sharing (RS) contract based on APM to achieve channel coordination. Finally, numerical analysis is presented to verify the conclusions obtained in this study.

Implications of credit default and yield uncertainty on supply chain’s equilibrium financial strategy

“…This plan has been implemented in Europe for more than 20 years, with the outcomes of solving the financing problem of SME manufacturers and promoting the cooperative relationship between the participants. Moreover, many other retailers in the automotive, beverage and FMCG industries (i.e., PSA Peugeot Citroen, Coca-Cola, and Procter & Gamble) have offered advance payments to ease the capital constraints of upstream suppliers/manufacturers (Shen et al, 2021 ).…”