Coordinating the supply chain finance system with buyback contract: A capital-constrained newsvendor problem

Abstract This paper studies the “Capital-constrained Newsvendor (CCNV)” problem in a Supply Chain Finance (SCF) system where the manufacturer offers a buyback (BB) contract to compensate the lender in the case of the retailer’s default. Firstly, a three-level Stackelberg game in the SCF system is characterized with the bank acting as a leader, the manufacturer as a sub-leader and the retailer as a follower. Then, the equilibriums of the SCF game are investigated under a monopolistic bank market and a competitive bank market respectively. On that basis, the coordination strategies of the SCF system are analyzed. It is found that a buyback contract combined with a wholesale price contract fully coordinates the overall SCF system, and all the SCF members benefit from the coordination as long as the buyback price coefficient falls within a favorable range known as the “Pareto Zone”. Additionally, a conditional buyback (CBB) contract is studied in the SCF system, and the partial credit guarantee (PCG) contract of Yan, Sun, Zhang, and Liu (2016) is further compared with our BB/CBB contract, confirming the substitutability of these two contracts in an SCF system.