Backup production decisions and financing strategies of a capital-constrained supplier with supply disruption

With the frequency of sudden disasters, global supply chains are at risk of supply disruption. Backup production is an appropriate but costly method for supply chains to solve supply disruption problems. However, few studies have taken into account that suppliers may face capital-constrained problems in the event of supply disruption, which limits their abilities to adopt backup production during the supply disruption. This research examines a supply chain scenario where the capital-constrained supplier encounters the risks of supply disruptions and explores the effects of various backup production decisions and financing strategies. We demonstrate that with large potential market size, the capital-constrained supplier will adopt manufacturer financing with backup production to mitigate his financial pressure, and the manufacturer will offer financing to the capital-constrained supplier. With the small potential market size, when selecting bank financing without backup production, the supplier will achieve the highest profits, but the manufacturer will not offer financing to the capital-constrained supplier. Moreover, the manufacturer cannot obtain higher profits with backup production adoption and high unit production cost. These insights highlight the critical relationship between financing strategies and backup production in enhancing supply chain’s resilience.