The Operations Of Supply Chains With Working Capital Constraints

Supply chains have become the main production and operations mode for today’s enterprises.Effectively coordinating the flows of logistics,information and capital in supply chains is the key to supply chain management.However,the real-world operations of a supply chain are often faced with some node firms’ lack of working capital.This leads to financial constraints to the those firms.The decisions of the constrained firms may make the whole supply chain fail to arrange its production according to its business plans and goals(to achieve supply chain efficiency)and result in the mismatch between supply chain production and the market demand.In this case,a constrained firm in a supply chain seeks to finance this constraint via either trade credit within the supply chain(e.g.deferred payments)or borrowing from an external financial institution(e.g.bank loans).Therefore,the management of a working-capital constrained supply chain has to answer the following two problems: how do firms in the supply chain make their operational decisions given the working-capital constrain(s)and which way should they choose to resolve the constraint(s).Furthermore,in addition to the working-capital constraint(s),environmental tax regulations increasingly require firms in a supply chain conduct environment-friendly operations and then bring firms additional regulatory costs.A typical regulatory policy adopted by governments and environmental NGOs is to tax firms’ greenhouse gas emissions in order to mitigate the global warming problem.Thus,managers of working-capital constrained supply chains have to analyze the impacts of regulatory costs on their operational decisions including the corresponding financial decisions.Finally,a wide observation is that a focal firm in a supply chain usually operates multiple retailing channels.Note also that the production cost depends on the total orders of all retailers,the working-capital constrained retailer’s order may affect the operations of others retailers via the focal firm’s wholesale price decisions which are based on its production cost.This requires supply chain managers to identify the cross-channel effect of the working-capital constrained retailer’s order on the decisions of the focal firm and other retailers.To answer above questions,this article takes a two-step strategy.Firstly,we build and solve(with the concept of subgame perfect equilibrium)two basic models that respectively capture how a two-echelon supply chain with a supplier and a working-capital constrained retailer operates when the retailer finances via internal trade credit and an external financial institution(i.e.a bank).With the equilibriums,we mainly explore the operational interactions in the supply chain under internal trade credit financing and external financing and figure out the conditions under which internal trade credit financing dominates(is dominated by)external financing.Secondly,we extend the basic models to two widely-observed operational settings: under environmental tax regulations and dual retailing channels.In the former extension,we demonstrate the impacts of emission tax on the operations of the supply chain respectively under internal trade credit financing and external financing.In the latter extension,we reveal the cross-channel effect of the relaxation of the working-capital constraint of one retailer on decisions of the supplier and the other retailer via its ordering decision.More specifically,the main research conclusions and innovative contributions of this article are as follows.Firstly,we characterize the equilibrium operational decisions including the retailer’s financing decision respectively under internal trade credit financing and external financing,and identify conditions under which internal trade credit financing dominates(is dominated by)external financing.In the supply chain,the profitability of the supplier,the retailer and the supply chain as a whole decreases in the(opportunity)cost of internal trade credit financing,but an increase in the external financing cost has an asymmetric impact on the supplier’s and the retailer’s profitability.There exists an internal of external financing cost rates such the supplier’s profitability increases in the external financing cost even if it always decreases the supplier’s profitability.Therefore,the comparison between the internal and external financing costs is the key to determine whether internal trade credit financing dominates(is dominated by)external financing.More specifically,for any given external financing cost,a low enough internal financing cost makes internal trade credit financing dominates external financing while for any given internal financing cost,a low enough external financing cost makes external financing dominates internal trade credit financing.Secondly,we demonstrate the influence of environmental tax regulatory policies(in terms of emission tax rates)on the operations of the supply chain and the corresponding profitability,respectively,under internal trade credit financing and external financing.High enough emission tax rates prevent the retailer from financing its working-capital constraint,no matter whether the supply chain is operated under internal trade credit financing or external financing.However,for lower emission tax rates,in the internal trade credit financing case,there is an emission tax linear dependent threshold of the internal trade credit financing cost such that the retailer finances(does not finance)it working-capital constraint for an internal trade credit financing cost lower(higher)than the threshold,but in the external financing case,there is an emission tax nonlinear dependent threshold of the external financing cost such that the retailer finances(does not finance)it working-capital constraint for an external financing cost lower(higher)than the threshold.Moreover,in both the internal trade credit financing and the external financing cases,an increase in the emission tax rate lowers the profitability of both members in the supply chain with lower levels of financing(when the retailer finances its working-capital constraint),production and(greenhouse gas)emission.Thirdly,we reveal the inter-channel effect of the retailer’s working capital constraint based on the supplier’s different production cost properties.We consider a dual retailing channel supply chain with one retailer has a working capital constraint and the other retailer does have such constraints and assume that each retailer sells to an independent final market.Suppose that the supplier(as the focal firm)can produce with either a constant marginal cost or an increasing marginal cost.We find that when the supplier’s marginal cost is constant,the working capital constraint does not have any impact on the strategic interaction between the supplier and the unconstrained retailer.However,when the supplier has an increasing marginal cost function,a relaxation of the working capital constraint(in terms of an increase in the amount of the working capital)raises the wholesale price and lowers the contracted quantity between the supplier and the unconstrained retailer,leading to a lower level of the profitability for the unconstrained retailer.