| Author: | Yu, Hang |
| Title: | Strategic interactions in supply chain under supplier capital constraint over two periods |
| Advisors: | Jiang, Li (LMS) Ye, Hengqing (LMS) |
| Degree: | Ph.D. |
| Year: | 2025 |
| Department: | Department of Logistics and Maritime Studies |
| Pages: | vii, 110 pages : color illustrations |
| Language: | English |
| Abstract: | The importance of long-term supply chain interactions can never be overstated. In the industrial world, a large number of retailers establish long-term relationships with suppliers, conducting transactions across multiple periods. Within such relationships, retailers strategically consider future operations when making current decisions, and suppliers, in turn, anticipate retailers' strategic thinking in purchasing when setting prices. This dynamic interaction leads to supply chain performance outcomes that differ significantly from those of single-period transactions. Another noteworthy phenomenon is that many suppliers operate under substantial capital constraint, especially during prevailing global economic downturns. In long-term relationships where suppliers face capital constraint, retailer strategic behavior manifests in two ways. First, strategic inventory, widely studied in the literature, is held to undercut future wholesale prices. Second, strategic purchasing occurs, where strategic retailers purchase more aggressively than myopic ones; the resulting higher early-period wholesale prices facilitate supplier capital accumulation, boosting their capital positions in later periods. This study investigates the role of strategic purchasing and inventory in influencing supply chain performances. To examine this problem, we develop a model where a retailer purchases from a supplier who faces a capital constraint over a two-period horizon. Their relationship is governed by a contract. Under dynamic contract, in each period, the supplier sets wholesale price, then the retailer purchases, subject to the supplier's capital that caps production. Under commitment contract, the supplier and retailer commit to wholesale prices and purchase quantities for both periods before sales begin. The retailer may hold inventory in period 1 for selling in period 2. The supplier's capital in period 2 is endogenized by early wholesale pricing and retailer purchasing. We solve the research objective under each contract type, and then compare the two contracts. We first disallow inventory carryover and compare two scenarios under each contract: one with a myopic retailer maximizing imminent profit, and another with a strategic retailer maximizing total profit over two periods. This helps isolate the effects of the retailer's strategic purchasing behavior. We also look into the design of contract to effectively leverage the retailer's strategic behavior for performance enhancement. We show that the retailer employs strategic purchasing when the supplier's production cost is moderate and initial capital position (ICP) is low; furthermore, this phenomenon is more prominent under dynamic contract. The retailer's strategic purchasing benefits the supplier and supply chain, but it may harm the retailer's profit under dynamic contract. From the perspective of increasing sales, dynamic contract is more effective when the ICP is moderate but commitment contract is more effective when it is low. To individual firms, when the production cost is low (high) and the ICP is moderate (low), the profits to both firms are higher under dynamic (commitment) contract than under the alternative contract. Otherwise, the supplier prefers dynamic contract while the retailer prefers commitment contract. These main results still hold in volatile markets, where strategic purchasing is more frequent, particularly under dynamic contract. In addition to robustness checks, incorporating uncertainty yields interesting insights. We next allow inventory holding to evaluate the effects of holding inventory by retailers on the operation interactions. Under dynamic contract, the retailer employs both types of strategic behavior; under commitment contract, he engages only in strategic purchasing. Thus, this part focuses primarily on dynamic contract; however, we still briefly compare the two contracts and confirm that key insights regarding their fundamental differences persist irrespective of inventory holding. Our results indicate that in case the supplier's initial capital position (ICP) caps operations, the supplier sets wholesale price to induce the retailer to purchase at full capacity in period 1. The retailer balances sales and inventory by weighing the benefit of enhanced supply and weakened supplier pricing power in period 2 against lowered sales and inventory holding cost in period 1. As a result, the retailer holds inventory either when production cost is not too high and the ICP is high, or when both are moderate; in the latter case, the inventory level can exceed that in the case without capital constraint at the supplier. In this chapter, the combination of the retailer's strategic purchasing and inventory continues to benefit the supplier more than the retailer. Nevertheless, inventory introduces crucial nuances. Inventory generally weakens this profit gain for the supplier. When both the production cost and the ICP are moderate, this effect can be significant that the supplier's profit falls below that when the retailer is myopic. Conversely, in this case, inventory benefits the retailer, creating a new situation where it is profitable for the retailer to behave strategically. Finally, we explore preordering, whereby the retailer preorders from the supplier in period 1 and deploys the preorder quantity for selling in period 2, to mitigate the inefficiency caused by holding inventory at a cost. Preordering generally eases the capital constraint in period 2 more effectively, leading to an improved supply chain profit. However, preordering may lower the profit of either the retailer or the supplier, albeit not simultaneously. We examine the impact of the supplier's capital constraint, finding robust conclusions regardless of whether inventory holding is allowed. Capital constraint may benefit the supplier, particularly when the production cost is high and the ICP is moderate. Nevertheless, it is detrimental to the retailer and supply chain. Furthermore, a decrease in the ICP, through its effects on firms' operation adaptations, can benefit individual firms and supply chain. |
| Rights: | All rights reserved |
| Access: | open access |
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