Financing Multiple Heterogeneous Suppliers in Assembly Systems

Buyer finance has been practiced by manufacturers/assemblers for years; however, few papers have investigated the efficacy of buyer finance in an assembly system with multiple suppliers. This paper fills the literature gap by comparing buyer finance with bank finance in a supply chain with one assembler and multiple heterogeneous capital-constrained component suppliers. We characterize the equilibrium solutions for different financing schemes (i.e., buyer finance, bank finance, and no finance). We show that in buyer finance the assembler should charge the suppliers the lowest possible interest rate, which may be even below its own unit capital opportunity cost, leading to losses in financing suppliers. However, the assembler can benefit more from enhanced inventory backup and lower component purchasing prices resulted from the low buyer finance interest rate. We further compare the different financing schemes from the perspectives of assembler, (borrowing and non-borrowing) suppliers, and the whole supply chain. Our analysis reveals that the assembler may offer buyer finance even if its own unit capital opportunity cost is higher than banks' risk-free interest rate. We also identify the conditions under which buyer finance is better than bank finance for each party as well as the whole supply chain, and demonstrate how the suppliers' initial capitals, production costs, and their heterogeneities affect the assembler's selection of the optimal financing scheme