Two-echelon supply chain operational strategy under portfolio financing and tax shield

Abstract

Purpose

The development of small- and medium-sized enterprises (SMEs) is vital to the economy, as such the financing of SMEs has become the focus of government and enterprises. The purpose of this paper is to find the operational and financial strategies of the supplier and retailer in supply chain.

Design/methodology/approach

In a Stackelberg game, supplier moves first setting wholesale price, while the retailer follows, setting the ordering quantity. Enterprises maximize their profits by optimization. When measuring profit targets, the capital constraints and income taxes of two companies are considered. In the portfolio financing model, the retailer can obtain products from suppliers through trade credit, and the supplier can use asset-backed securitization (ABS) to solve his/her financing problems.

Findings

The wholesale price is a decreasing function of retailer’s initial cash balance, and the supplier’s financing interest rate is a decreasing function of his/her own capital, the incentive effect of the supplier’s price discount strategy on retailer is more intense in the supply chain with high-priced product or high-capital retailer. And in a capital-constrained supply chain, an increase in tax rate or financing rate does not necessarily motivate the supplier to increase wholesale price. Most importantly, if the supplier’s markup is moderate, portfolio financing has value for both retailer and supplier, while solving the financing problems of both parties.

Research limitations/implications

Future research can consider the explicit and implicit interest when supplier provides trade credit to retailer. It is also possible to consider the portfolio financing when multiple retailers are facing financial constraints.

Practical implications

It provides guidance for supply chain enterprises with financing needs, helping them find optimal decisions. With financial interest, enterprise income tax on the enterprises’ financing factors will produce a tax shield effect; thus, a cost–benefit analysis with the tax shield effect can provide more accurate picture when making corresponding decisions.

Social implications

Government takes feasible adjustments of tax rate for the sake of motivation on financial SMEs tax shield. Furthermore, ABS calls for service from financial institutions, which will, in turn, expedite financial institutions revenue.

Originality/value

The authors provide insights on enterprise financing models, combining ABS with trade credit, expanding enterprise financing channels and enriching the theory of financial supply chain and supply chain management. The authors analyze in detail the influence of tax factors on enterprises by introducing tax factors into traditional process of enterprise operation and financing strategy.

Citation

Dong, G., Wei, L., Xie, J., Zhang, W. and Zhang, Z. (2020), "Two-echelon supply chain operational strategy under portfolio financing and tax shield", Industrial Management & Data Systems, Vol. 120 No. 4, pp. 633-656. https://doi.org/10.1108/IMDS-07-2019-0395