Impact of Retailer Financial Status on Supply Chain Coordination

This study examines contract coordination in a supply chain (SC) consisting of a supplier and a financially constrained newsvendor-like retailer. The retailer may utilize trade credit to finance inventory. We first analyze the retailer’s optimal response under a trade credit contract, demonstrating its inability to achieve SC coordination. To address this limitation, we investigate two coordination mechanisms: a standalone buyback contract and a portfolio contract integrating buyback and trade credit terms. The retailer’s financial status is classified into four distinct categories based on capital availability: extreme shortage, relative shortage, relative sufficiency, and sufficiency of funds. Contract coordination outcomes are classified into three types: perfect coordination, conditional coordination, and non-coordination. Our findings reveal three key insights: (i) Contract coordination is contingent on the financial status. (ii) As the retailer’s initial capital increases, the likelihood of coordination under the portfolio contract initially rises and then declines, whereas, under the buyback contract, it increases monotonically. (iii) External financial opportunities invariably influence the design of the portfolio contract when capital levels are extremely low; otherwise, their impact happens if and only if the financial interest rate is small enough. These findings offer valuable insights into the design and application of contracts in financially constrained SCs, emphasizing the critical role of financial status in achieving coordination.