Optimal strategies for supply chain with credit guarantee using CVaR

Abstract

In this paper, we explore optimal strategies of a supply chain consisting of one manufacturer, one capital-constrained retailer and one bank, where the bank provides loans to the retailer due to credit guarantees. However, there are default risks if the retailer can not repay the loans. Using conditional value-at-risk (CVaR) to describe risk aversion of the retailer, optimal order quantities of the retailer and optimal wholesale prices of the manufacturer are obtained by solving a Stackelberg game model, where the manufacturer is a leader and the retailer is a follower, respectively. Our numerical results show that default probabilities of the retailer are proportional to optimal wholesale prices of the manufacturer. It implies that when the default probability of the retailer is high, the manufacturer should reduce the default risk by setting higher wholesale prices to avoid a burden of a substantial guarantee. Thus, our results can serve as insights for decision-makers of supply chain management.