Abstract:

The capital shortage hinders transaction activities， and thereby results in low efficiency of the supply chain. If an upstream firm does not have enough cash flow， it will be incapable to meet order requirements of its downstream firm， and subsequently affects performance and efficiency of the entire supply chain. A natural question arises： Is it possible to achieve supply chain coordination if the supplier is shortage of funds and has to shoulder advertising costs？ With the help of trade credit， can it realize channel coordination？ What contract mechanism can coordinate the supply chain？ Besides， the supplier’s working capital affects its production capacity， and the working capital is affected by the supplier’s initial capital， the timing of payment for goods， and the timing of advertising expenses split. This arises another related question. What is impact of the initial capital， the timing of payment for goods， and the timing of advertising expenses split on coordination of the supply chain？To answer the above-mentioned questions， a supply chain composed of a cash-constrained supplier and a well-funded retailer is considered. The two firms cooperatively carry out advertising， in which the retailer can finance for the supplier by paying the advertising expenses or the ordered products in advance. Three scenarios is discussed as below： normal payment （non-financing mode）， the retailer paying advertising expenses for the supplier， and payment of the products ordered in advance （two financing modes）. This study focus on revenue sharing contract and buyback contract， for the two contracts are widely used in business practice， and obtain the most extensive attention in theory. Furthermore， the two contracts are equivalent， and hence provides a benchmark for us to investigate their equivalence in a new setting.Firstly， all contracts are classified， according to coordination of contracts， into three categories： complete coordination contract， partial coordination contract and non-coordination contract. The superiority of two contracts is defined under channel coordination， i.e.， both the two contracts can achieve the expected profit maximization. Contract A is superior to contract B， if Contract A can replicate any split scheme that Contract B can achieve， but the contrary is not true. Put another words， Contract A is more flexible than Contract B.In the subsequent， the threshold conditions are characterized， from perspective of the initial capital， for realization of supply chain coordination and arbitrary profit split via the two contracts. The coordination of the two contracts is analyzed， and it is shown that the two are equivalent if the supplier faces no cash shortage or the retailer doesn’t provide financing support towards the supplier， albeit suffered from cash shortage. In the presence of capital shortage and financing， buyback contract is superior to revenue sharing contract. Moreover， their advantages and disadvantages are disaussed under the three scenarios， and the conclusions are obtained as follows. Under either contract， the advance payment mode is superior to that of paying advertisement fee for the supplier， whereas the latter is superior to the normal payment mode. In particular， the buyback contract can always coordinate the supply chain under the advance payment mode， even though the supplier’s initial capital is extremely short.Lastly， the impact of the initial capital and profit split on coordination of the two contracts is investigated. The likelihood that the supply chain coordination can be achieved via the two contracts increases in the initial capital and decreases in the split share claimed by the supplier.From discussion we obtain the following managerial guidance. First， in the case of funds shortage， the retailer should provide financing to the supplier by paying advertising expenses or the products ordered in advance， and payment for the products ordered in advance is better than that of paying advertising expenses in advance. Second， if the supplier is facing shortage of funds， it should adopt payment for the products ordered in advance and make use of the buyback contract to coordinate the supply chain.

Key words: supply chain coordination, financial constraints, cooperative advertising, coordination via contracts