Operational and financial decision making in supply chain with budget constraint

Abstract

Small and medium-sized enterprises (SMEs) are a fast growing group in many areas around the world, especially in developing countries like China. With a limited budget, the development of SMEs is financially restricted. As a link in the supply chain, the budget-constrained SMEs make decisions by interacting with other participants of the supply chain consisting of suppliers, lending banks, logistics service providers, etc. This research studies how the possible frictions such as bankruptcy costs, bank loans, loss aversion and risk allocation may influence the operational and financial decision making of a supply chain with a budget-constrained SME when facing uncertain market demand, and thus how the overall supply chain efficiency will thus be affected. With a limited budget, an SME has to seek financial support from lending banks in order to operate. The SME may suffer costly bankruptcy if it fails to repay the loan. Moreover, an SME targeting at long-term survival may not stay risk-neutral, and his risk orientation will affect his decision and further the decisions of other participants in the supply chain. This study aims at investigating the decision processes of the supply chain members within the framework of a Stackelberg game in which some members have limited bargaining power against other participants in the supply chain. It studies how the allocation of demand uncertainties (or risks) in the supply chain will lead to different decisions of an SME and the supply chain efficiency, how the optimal wholesale pricing of the supplier and the optimal order quantity of the retailer are obtained and how the bank’s lending decisions are affected. It is found that the phenomenon of double marginalisation exists in the decentralised supply chain with budget constraint. Such a phenomenon, however, might be eliminated under certain conditions when the budget-constrained retailer is loss averse or financed by a profit-maximising bank. The research can in general serve as a benchmark for budget-constrained SMEs making decisions when faced with uncertain demand, as well as for enhancing the efficiency of the entire supply chain. Numerical experiments are carried out to demonstrate the impact of the level of frictions and the market demand condition on the operational and financial decision making of the supply chain.