Benefits of third-party logistics firms as financing providers

We investigate the design of a supplier’s wholesale price contract and a third-party logistics (3PL) firm’s joint logistics and financing services contract in a three-tier supply chain comprising a supplier, a 3PL firm, and a newsvendor-like retailer with capital constraints. The retailer can apply for bank financing or 3PL financing for purchasing when necessary. All members engage in a Stackelberg game with the supplier functioning as the leader. Our analysis indicates that the 3PL who finances the retailer with a low interest rate induces the retailer to order more, thereby causing the 3PL to obtain more profit from logistics services. The supplier benefits from 3PL financing by receiving a larger order from the retailer. Compared with bank financing, a retailer whose working capital level is not too low can benefit more with 3PL financing owing to lower purchasing (ordering and transportation costs) and financing costs. We further conclude that all members’ optimal decisions remain unchanged when the 3PL is also capital constrained but can borrow from a bank. We examine the retailer and supplier’s issues when the 3PL functions as the game leader instead of the supplier, and numerically demonstrate that the retailer and 3PL are better off while the supplier is worse off under 3PL leadership. Our results explain why 3PLs are willing to finance retailers’ inventories in business practice and suggest that 3PLs should set low financing interest rates to improve channel performances.