Quick response strategy under the financial constraint

Abstract

The major challenge, which the financially insufficient firm tries to overcome, is the uncertain demand during the sales season and the possible bankruptcy due to the lower demand than the initial order quantity. Most traditional studies on the operational decision problem address this challenge by assuming that the retailer has enough capital to procure as many products as necessary. However, small and medium size firms with insufficient capital or even startup companies are generally financially constrained for procuring or producing the product. Thus, to address the financially constrained problem, in this study we model a financially constrained two-level supply chain consisting of a financially-deficient retailer and a bank. In this supply chain, the supplier can sell a product at two wholesale prices to the retailer before and during the sales season, respectively. Then the retailer makes an initial order to the supplier with this loan from the bank and then sells the product to its customers at a selling price during the sales season. Moreover, if the realized demand is more than the initial order quantity, the retailer can make the second order at a higher wholesale price than the initial wholesale price. The analytical results from this model can be summarized as follows: First, the retailer’s optimal initial ordering decision is a non-increasing function of the bank’s decision, interest rate. Second, as the procuring cost through the quick response increases, the retailer’s initial ordering quantity increases and thus the amount of loan from the bank increases. Third, as the retailer’s initial capital increases, the amount of loan from the bank decreases. Forth, the retailer’s initial ordering quantity with the quick response strategy is almost surely less than without the quick response strategy. © 2020 by the authors; licensee Growing Science, Canada.