Financing strategies for a capital‐constrained manufacturer in a dual‐channel supply chain

• Date: 01 September 2020
• Author: Huamin Wu,Shuang Xiao,Guo Li
• Published date: 01 September 2020
• DOI: http://doi.org/10.1111/itor.12653

Intl. Trans. in Op. Res. 27 (2020) 2317–2339

DOI: 10.1111/itor.12653

INTERNATIONAL

TRANSACTIONS

IN OPERATIONAL

RESEARCH

Financing strategies for a capital-constrained manufacturer

in a dual-channel supply chain

Guo Lia,b,c, Huamin Wua,b and Shuang Xiaod,∗

aSchool of Management and Economics, Beijing Institute of Technology, Beijing 100081, China

bCenter for Energy and EnvironmentalPolicy Research, Beijing Institute of Technology, Beijing 100081, China

cSustainable Development Research Institute for Economy and Society of Beijing, Beijing 100081, China

dSchool of Finance, Zhongnan University of Economics and Law, Wuhan 430073, China

E-mail: liguo@bit.edu.cn [Li]; 3120185786@bit.edu.cn [Wu]; xiaoshuang@zuel.edu.cn [Xiao]

Received 2 January 2019; received in revised form 15 February 2019; accepted 1 March 2019

Abstract

This study investigates a co-opetition-type dual-channel supply chain that consists of a competitive supplier

(CS) and a capital-constrained manufacturer (CCM). The CCM procures key components from and simulta-

neously competes with the CS in the consumer market. To address the CCM’s capital constraint, we consider

three financing strategies, namely, trade credit, bank loan, and hybrid financing (i.e., combined use of bank

loan and equity financing). Game models are established to characterize the interactions between the CS

and CCM. The corresponding equilibria are derived under each strategy. Then, comparative analyses are

conducted, and the CS’s and CCM’s preference structures regarding the three strategies are revealed. On this

basis, the equilibrium strategy can be concluded as either trade credit or hybrid financing, but never bank

loan. Specifically, when the equity financing ratio is small or large, trade credit is an equilibrium strategy.

When the equity financing ratio is medium, the equilibrium strategybetween trade credit and hybrid financing

is determined by consumers’ product preference and loan interest rate.

Keywords:capital constraint; dual channel; trade credit; bank loan; equity financing

1. Introduction

With rapid economic development, “co-opetition”1has been increasinglyadopted in business today

(Niu et al., 2018). In practice, twocompanies may compete in the consumer market and cooperate in

businesses, such as component supply, cooperative purchasing, and R&D. The following examples

are considered. Apple Inc. and Samsung, two of the largest smartphone vendors in the world,

∗Corresponding author.

1The term “co-opetition” was first proposed by Brandenburger and Nalebuff (1997).

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2318 G. Li et al. / Intl. Trans. in Op. Res.27 (2020) 2317–2339

accounted for a combined shipping volume of over533 million units in 2017. This value is equivalent

to 36.3% of the global smartphone market.2Although the two companies are in fierce competition

in their industry, they cooperate with each other in many areas.3Notably, Samsung has provided

Apple with processors and OLED screens for many years.4Such “co-opetition” is prevalent in

many high-technology industries. Other typical examples are IBM and Cisco.The former purchases

network equipment from the latter, while simultaneously competing in the overall server market.5

The dual-channel supply chain, in which a supplier providesa manufacturer with key components

while the two companies compete with each other in the final market, is common in real businesses.

However, in practice, certain manufacturers in such dual-channel supply chains may lack capital

to support production. For example, the smartphone screens used by Gionee, a well-known smart-

phone manufacturer in China, have always been provided by Foxconn. However, in recent years,

Gionee has encountered capital-shortage problems and sought financing instruments to support its

production. Consequently, one of the critical challenges for Gionee is selecting a suitable financing

strategy.

Accordingly, we extend the current literature by examining a co-opetition-type dual-channel

supply chain, which consists of a competitive supplier (CS) and a capital-constrained manufacturer

(CCM). The two firms are cooperativein component supply but competitive in the consumer market.

Specifically, the CCM procures components from the CS. Meanwhile, the two companies compete

by selling substitutable products in the same consumer market. For the capital constraint of the

CCM, we consider three financing strategies. In Strategy 1 (trade credit), the CS offers trade credit

to the CCM. In Strategy 2 (bank loan), the CCM seeks a bank loan to support its production cost.

In Strategy 3 (hybrid financing), the CCM may employ a hybrid financing strategy by combining a

bank loan and equity financing. Driven by this setting, our motivation stems from the interest in

answering the following questions: (a) What are firms’ equilibrium decisions under each financing

strategy in the co-opetition dual-channel supply chain? (b) How do business factors, such as equity

financing ratio, affect the equilibrium outcomes? Lastly, (c) which financing strategy will the CCM

and CS prefer?

Toanswer these questions, we first construct game models to characterize the interactions between

the CS and CCM and derive their respective equilibrium decisions under the three strategies.

Meanwhile, the effectsof consumer preference and equity financing ratio on equilibria are identified

through sensitivity analyses. An interesting finding is that whether equity financing is beneficial for

the CCM is closely related to consumer preference for the CCM’s product and interest rate of

the bank loan. Finally, we comparatively analyze the three strategies. Results reveal that the CS’s

dominant strategy would be either trade credit or hybrid financing depending on various business

factors (i.e., interest rate of the bank loan, consumers’ product preference, and equity financing

ratio). The same is true for the CCM. As a result, the final equilibrium strategy is either trade

2Available at https://www.techspot.com/news/73082-idc-apple-overtakes-samsungsmartphone-market-globalshipme

nts.html.

3Available at https://www.forbes.com/sites/amitchowdhry/2014/08/06/apple-andsamsung-drop-patent-disputesagai

nst-each-other-outside-ofthe-u-s/#656d7c8418ca.

4Available at https://www.cnet.com/news/apple-samsung-still-bedfellows-as-they-eye-nextiphone-report-says/.

5Available at http://abcnews.go.com/Business/story?id=7098334.

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2019 The Authors.

International Transactionsin Operational Research C

2019 International Federation ofOperational Research Societies