Coordinating Buyback Contract in Supply Chains with Limited Funding

Abstract

The paper considers the problem of supply chain profit maximization with the buyback contract. The solution is given for a two-echelon supply chain where a retailer is faced with limited funding and chooses between bank financing and trade credit provided by a supplier. It is shown that the buyback contract does not coordinate the considered supply chain as the supplier’s profit in this case does not achieve its maximum. Therefore conditional coordination of the supply chain with limited funding is considered. It identifies the situation where the retailer’s and the supply chain’s profits are maximized while the supplier’s profit is greater than that earned with the wholesale-price contract. It is proved that the examined supply chain achieves conditional coordination both with bank loan and trade credit, and trade credit is preferred to bank financing as the supply chain’s individual and total profits are higher than those earned with bank loan. Based on the model solution an algorithm for selecting the parameters of conditionally coordinating buyback contract with limited funding is proposed.