Supply chain coordination under budget constraints

Budget constraints are commonly considered in real decision frameworks; however, the literature has rarely addressed the design of contracts for supply chains with budget-constrained members and in which capital costs are considered. In this article, we study supply chain coordination of budget-constrained members when a financial market is unavailable. We propose a revenue-sharing-and-buy-back (RSBB) contract that combines revenue-sharing (RS) and buy-back (BB) contracts. We compare the performance of RS, BB, and RSBB contracts under a coordinated two-stage supply chain in which members experience budget constraints. Results show that the RS and BB contracts are not feasible under certain budget scenarios, whereas the RSBB contract can always be used to coordinate the supply chain and arbitrarily divide profits. We propose a profit allocation approach to address information symmetry created by undisclosed budget thresholds. Our analytical and numerical results provide insight into how managers select an appropriate contract based on their budget scenarios and capital costs. In existing studies on supply chain contracts, it has been commonly assumed that all of the supply chain members have infinite budgets. Under this assumption applied to a conventional market setting, the retailer orders fewer products than the channel-wide optimal quantity (Spengler, 1950). In developed economies, such as those in the United States or the European Union, a powerful supplier (or retailer) has enough access to the financial market to obtain a sufficient budget. However, in many developing countries that do not have an advanced financial market, supply chain members , even the most powerful, may be unable to obtain sufficient money to order optimal quantities. In these cases, supply chain managers must make decisions under strict budget constraints such that they order fewer products than the channel-wide optimal quantity. The motivation for considering absolute budget constraints is illustrated by examples from China. Li Jun Orchard (LJO) plants and supplies peaches and watermelons to retailers in Beijing. The retailers pay a deposit when sending orders to LJO and pay the balance when they receive the products. LJO cannot obtain bank loans because fruit growing is a high-risk industry that can be significantly influenced by natural disasters, and the company does not have the cash flow to satisfy bank requirements. In another example, from Moon, Feng, and Ryu (2015), an electronics distributor in China cannot secure a bank loan because neither its fixed assets nor cash flow amounts satisfy financing requirements. The managers of LJO and the …