Supply chain financing with advance selling under disruption

• Author: Anshuman Chutani,Varun Gupta
• Published date: 01 September 2020
• DOI: http://doi.org/10.1111/itor.12663
• Date: 01 September 2020

Intl. Trans. in Op. Res. 27 (2020) 2449–2468

DOI: 10.1111/itor.12663

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Supply chain financing with advance selling under disruption

Varun Guptaa,∗and Anshuman Chutanib

aDepartment of Project & Supply Chain Management, Sam and IreneBlack School of Business, Penn State University

Erie, Erie, PA16509, USA

bDepartment of Operations Management & Information Systems, Nottingham University Business School, Nottingham

NG8 1BB, UK

E-mail: vxg15@psu.edu [Gupta]; anshuman.chutani@nottingham.ac.uk [Chutani]

Received 28 November2018; received in revised form 21 February 2019; accepted 14 March 2019

Abstract

We study a financing problem in a supply chain (SC) consisting of one supplier and one buyer under supply

disruption. The supplier could face a disruption at its end which could effectively reduce its yield in case of

disruption, thereby resulting in supply yield uncertainty. The retailer can finance the supplier using advance

selling that can help mitigate the impact of disruption. We model this problem as a Stackelberg game, where

the supplier as the leader announces the wholesale price and the retailer responds by deciding its optimal

order quantity given stochastic demand and an exogenous fixed retail price. The supplier then commences

production and a disruption can happen with a known probability. We assume that under disruption the

quantity delivered is a fraction of the initial quantity ordered by the retailer. The retailer loses any unmet

demand. We analyze three different scenarios of the Stackelberg game, namely no advance selling with

disruption, advance selling without disruption, and advance selling with disruption. Our results indicate that

advance selling can be used to mitigate the impact of supply disruption and atthe same time could lead to an

increase in the overall SC profit.

Keywords:supply chain finance; advance selling; supply disruption; supply chain risk management

1. Introduction

Supply chain finance (SCF) focuses on creating liquidity in the supply chain (SC) by means of

various buyer-led or seller-led initiatives such as financial loans, trade credits, etc. The role of SCF

is to ensure the availability of a working capital for SC partners that optimizes both operational

costs and costs of financing. Large retailers,such as Target and Wal-Mart,often procure from small-

or medium-sized enterprises (SMEs) suppliers who often lack enough working capital to ensure

a steady supply stream. In addition, these suppliers are generally located in developing countries

where the bank loans may be not easily available, or when available, could be very expensive. Even

∗Corresponding author.

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2450 V.Gupta and A. Chutani / Intl. Trans. in Op. Res. 27 (2020) 2449–2468

though the production and supply costs are generally low in the developing countries, the financial

costs might not be and SCF has generated a lot of interest in successful partnerships between the

retailers and the suppliers.

There are several different SC financing options available for a retailer who wishes to support her

critical supplier. These options include prepayment for the supplies and investing in the supplier.

Prepayments to a supplier are typically tactical in nature and can take different forms such as

reverse factoring, purchase order financing, advance selling, etc. Investments in a supplier are more

strategic and are especially common when the supplier has a proprietary process or a specialized

skill set. The investment efforts can take many forms such as equity investments, joint venture,

subsidiary, etc. In this paper, we examine a particular SC financing strategy that is prepayment to

the supplier by the retailer, which could help mitigate the impact of SC disruption risk. We examine

the impact of using the advance-selling (cf. Cho and Tang, 2013; Yu et al., 2014) financing option

when the retailer prepays the supplier for the products before the production (and delivery) of the

final product.

In recent years, major supply disruptions (cf. Oke and Gopalakrishnan, 2009; Gupta et al.,

2015; He et al., 2016) have had negative effects on the ability of suppliers to satisfy the orders

placed by retailers. This problem becomes more severe in the presence of a supplier who lacks

working capital or a buyer (Blome and Schoenherr, 2011). Even though the impact of the loss of

supply for retailers is well known and can be severe, there has been little attention to this area

of research that studies suppliers who are prone to disruption. In our study, we argue that under

the advance-selling arrangement, payment prior to the commencement of production can provide

the supplier additional cash that can be useful in restoring its capability (fully or partially) to

produce in case of disruption, and hence can help in mitigating the impact of a supply disruption.

Furthermore, an advance-sellingarrangement can also increase the overall SC profit. Tothis end, we

analytically formalize our understanding of the disruption reduction and study the dyadic SC using

different Stackelberg games with and without disruption and advance selling. Some recent studies

include Mizgier et al. (2015), Sahebjamnia et al. (2018), He et al. (2018), and Zhang et al. (2018).

Mizgier et al. (2015) tested whether risk of operational disruptions can be managed through a

combination of process improvement and capital adequacy. They model capital amount allocation

to the different risk event types using the loss distribution approach. Sahebjamnia et al. (2018)

developed a multiobjective mixed-integer probabilistic programming model to assess the resilience

of manufacturing in the face of multiple disruptions. The authors argued that the interaction

between budget externalresources and organizational resilience is critical for achievingthe successful

recovery strategy.

Our work is closely related to a study by Taleizadeh (2017). They developed a lot-sizing model

for a retailer with advance selling and supply disruption with partial backordering. The supply

disruption considered in the paper realizes when an entire batch of production is rejected once a

defective product is discovered by a quality inspector at the production floor. The model studied

in their paper considers a retailer–supplier SC where the supplier requires partial prepayment for

the order, and the retailer allows backordering of the deterministic demand. The wholesale and

retail prices are considered to be exogenous and unaffected by the disruption. In our study, we

relax some of these assumptions such as we assume the demand to be stochastic and allow for the

wholesale price to be adjusted based on disruption. In addition, in our paper, we assume that the

supply disruption affects the overall yield of the supplier who can deliver partial order quantity

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2019 The Authors.

International Transactionsin Operational Research C

2019 International Federation ofOperational Research Societies