The Value of Buyer Financing under Stochastic Component Cost in Supply Chains with Disruption Risk

Abstract

This study delves into the dynamics of a supply chain scenario wherein a capital-abundant retailer extends buyer financing to a capital-constrained supplier. The supplier procures components from the spot market and subsequently procures the final product, subject to a certain probability of disruption. We introduce a Geometric Brownian Motion (GBM) model to capture the variability of component costs. We characterize the equilibrium results under different financing schemes, including buyer financing and bank financing. The retailer’s equilibrium order time under buyer financing is earlier than that under bank financing iff the probability of disruption is relatively small. When the trend of the component cost is downward, the retailer will place the order at the end, and buyer financing is advantageous for the retailer but detrimental for the supplier. If the component cost shows a slight upward trend with minor fluctuations and settles into a moderate range, immediate buyer financing and transaction execution can yield a win-win outcome for the retailer and supplier with high delivery probability. We also numerically compare our optimal policy with other naive policies, and extend our model to an an Ornstein-Uhlenbeck (OU) process.

Keywords

Buyer financing / bank financing / geometric Brownian motion / disruption

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Systems Engineering Society of China and Springer-Verlag GmbH Germany