Operations and Financing Decisions of the Capital-constrained Retailer under Uncertain Demands


Student thesis: Doctoral Thesis

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Awarding Institution
Award date11 Mar 2019


In the post-financial crisis era, a large number of SMEs encountered a shortage of working capital. At the same time, alternatives to bank credit financing for SMEs have been accelerating into being, accompanied by the widespread use of “trade credit” and the development of “supply chain finance”. As a result, the capital issue in the supply chain has received widespread attentions in academic research in the past decade, and the “Capital-constrained Newsvendor (CCNV)” problem aimed at studying how capital constraint affects the retailer’s operational decisions has become a hot topic in the field of Operations Management. This study addresses the CCNV problem from a variety of new perspectives.

Firstly, this study examines the CCNV’s integrated purchase timing, quantity and financing decisions. Inspired by the research of Swinney et al. (2011) on capacity decisions of strart-ups, a random price-dependent demand is introduced into the CCNV problem and the CCNV’s purchase timing, quantity and financing decisions are examined. Results show that at both purchase moments (i.e. early-purchasing at the beginning of lead time and late-purchasing at the beginning of selling season), there always exists a critical value, and when the retailer’s internal capital level is less than the critical value, it will borrow from the bank to purchase a larger quantity; otherwise, it will not borrow and just exhaust its internal capital for purchasing. The capital-constrained retailer can get an “information bonus” from late-purchasing only when its internal capital level is relatively low, so it needs a trade-off between the “conditional information bonus” and the “inevitable cost loss” brought by late-purchasing and then makes an optimal purchase timing decision. A multi-parameter-based method is proposed to solve the timing decision problem, and it is found that the retailer’s optimal purchase timing decision can be determined by three sets of parameters, namely the demand-related parameters (i.e. mean and variance of market size), the cost-related parameters (i.e. wholesale prices and loan interest rate), and the capital-related parameter (i.e. internal capital level).

Secondly, this study investigates the CCNV’s integrated ordering, pricing and financing decisions. Using a similar random price-dependent demand, removing the assumption on the retailer’s “clearance strategy”, the pricing issue considered by Li et al. (2012) is further introduced into the CCNV problem and the retailer’s integrated ordering, pricing and financing decisions are then investigated. In particular, impacts of demand uncertainty and capital constraint on the retailer’s ordering and pricing policies are examined. Results show that when demand uncertainty level is relatively low, the retailer facing demand uncertainty always tends to set a lower price than the riskless one, while the order quantity may be smaller or larger than the riskless retailer’s depending on the level of the market size. When adding a capital constraint, the retailer will definitely prefer a policy with a “higher price but smaller quantity”. However, under a high demand uncertainty scenario, the impacts will be more intricate. The retailer facing demand uncertainty will always order a larger quantity than the riskless one if demand uncertainty level is high enough (above a critical value), while the capital-constrained retailer is likely to set a lower price than the well-funded one when the demand uncertainty level falls within a specific interval. It demonstrates that the impact of capital constraint on the retailer’s pricing decision can also be regulated by different demand uncertainty levels.

Thirdly, this study explores the CCNV’s optimal financing mode selection policies towards bank credit and trade credit. Through further introducing TCF (Trade Credit Financing) examined by Chen (2015) into the CCNV problem, the CCNV’s financing mode selection decisions towards BCF (Bank Credit Financing) and TCF are studied with considering an implicit bankruptcy cost and a “newsvendor-style (probabilistic)” demand. It is found that in a single credit channel, the retailer prefers TCF to BCF only when the interest rate of TCF (TCF-IR) is lower than a threshold, and the “dominant area” of TCF expands with the increase of bankruptcy cost. However, in a dual credit channel, the retailer’s financing mode selection policies are significantly influenced by different repayment priorities. Specifically, if BCF is repaid first, as the TCF-IR rises from zero, the retailer first chooses only TCF, then a portfolio of BCF and TCF, and finally only BCF. On the contrary, if TCF is repaid first, the retailer tends to choose a single credit channel (BCF or TCF) if the TCF-IR is not greater than a threshold or if the bankruptcy cost coefficient is higher than a threshold; otherwise, a portfolio of BCF and TCF, or only BCF is chosen. In addition, the effects of internal capital level on the retailer’s financing mode selection behaviors are also examined, and it is found that retailers with higher internal capital are more likely to prefer BCF to TCF.

Finally, this study tackles the CCNV problem in an emerging SCF (Supply Chain Financing) business. Inspired by Yan et al. (2016) who consider an SCF system with partial credit guarantee (PCG) contract, this study examines the CCNV problem in the SCF system with another guarantee mechanism, i.e. the buyback scheme in which the supplier offers a buyback contract to compensate the lender in the case of the retailer’s default. A three-level Stackelberg game in the SCF system is characterized and the optimal policies for each of the participants (i.e. the retailer, manufacturer and the bank) are studied. In particular, when solving the leader’s problem in a three-level Stackelberg game, some major errors of Yan et al. (2016) are corrected. Then, theoretical equilibriums of the SCF game and coordination strategies of the SCF system are investigated under a monopolistic bank market and a competitive bank market respectively. Results show that a buyback contract combined with a wholesale price contract can fully coordinate the overall SCF system, and all the SCF members can benefit from the coordination as long as the buyback price coefficient falls within a favourable range known as the “Pareto Zone”. In addition, the PCG contract of Yan et al. (2016) is briefly revisited, and it can be verified that a similar role with the buyback contract proposed in this study results, confirming the substitutability of these two contracts in an SCF system.