Strategic financing options in a supply chain facing guarantee shortages and capital constraints under demand uncertainty

Abstract

When distributors, as small and medium-sized enterprises (SMEs), encounter financial constraints and market uncertainty, manufacturers can offer guarantees and product buyback (credit-buyback-financing strategy, CBF) to mitigate risk and enhance output. Recently, the rise in popularity of third-party guarantee institutions introduces additional options for supply chain members, including coguarantee (credit-coguarantee-financing strategy, CCF) or a combination of coguarantee and buyback (credit-coguarantee-buyback-financing strategy, CCBF). To determine the optimal financing strategy, this paper scrutinizes the efficiencies and profitability associated with these three formats within an analytical framework. We find that the downstream distributor always favors CCBF, while the manufacturer’s inclination shifts from CBF to CCF/CCBF as the buyback price decreases (he prefers CCF when the coguarantee share is high; prefers CCBF otherwise). The guarantee institution mirrors the manufacturer’s choices, expressing a preference for CCF when the buyback price is high and the coguarantee share is moderate. Especially, a Pareto improvement is achievable for three partners by employing CCBF under certain conditions. In this case, CCBF induces an appropriate guarantee fee rate, promoting order quantities without excessive default risk, thereby benefiting all parties involved. These results provide valuable insights for managers in identifying a financing strategy that facilitates a triple-win situation.