Recovery from demand disruption: two-stage financing strategy for a capital-constrained supply chain under uncertainty

• A two-stage financing scheme for demand disruption recovery is examined. • Minimax regret order decision for capital-constrained retailer is obtained. • Mixed recovery, pure penalty and investment strategies are proposed. • Pure investment strategy has the least bankruptcy risk for retailer. • Bank-bank and bank-supplier financing have less bankruptcy risk for retailer. This paper addresses recovery strategies for supply chain enterprises under uncertain demand. Specifically, a bank or supplier is considered to provide financing for a capital-constrained retailer to reduce or even eliminate the negative impact of disruption. The problem is formulated with a bank-supplier-retailer game model. A robust optimization approach is used to obtain the retailer’s minimax regret order quantity where only the upper and lower bound of demand are known. Four financing strategy combinations for two-stage financing before and after demand disruption are proposed, including bank-bank, supplier-supplier, bank-supplier, and supplier-bank. With respect to supply chain recovery, three strategies of mixed recovery, pure penalty, and pure investment are proposed, and their performances are examined. Furthermore, the impact of each financing combination and recovery strategy on the retailer’s regret, bankruptcy risk, and profit are analyzed, which provides a basis for financing decisions. The relevant results show that the pure investment strategy can not only protect the bank and supplier from losing profit due to disruption, but also bring less bankruptcy risk to the retailer. On the other hand, penalty strategy can also mitigate the negative impact of disruption on the supplier, but it will lead the retailer to facing higher risk of bankruptcy. For the retailer, the bank-bank and bank-supplier financing combination is superior to the others because they are less likely to result in bankruptcy. Finally, as an extension, the proposed models are applied to some other financing schemes which are commonly employed in practice, and some managerial implications are drawn.