Preselling to a retailer with cash flow shortage on the manufacturer

In this paper, we consider a supply chain that consists of one manufacturer and one retailer. Due to long production lead time and high cost associated with bank loans, the manufacturer considers offering products at a discounted price, before production starts, to the retailer to raise the necessary cash for production. We investigate the manufacturers optimal mix of financing strategy with preselling by studying a three-stage Stackelberg game between the supply chain members. As a game leader, considering the interest costs associated with bank loans, the manufacturer first determines the discount rate for the presale. The retailer determines the advance ordering quantity and then pays the manufacturer. Given the amount of on-hand cash, the manufacturer determines the amount of cash to be borrowed from a bank (if necessary) and the quantity of products to be produced. Finally, market demand is realized and satisfied by the inventories of the retailer and/or the excess inventory of the manufacturer. Optimal pricing and quantity decisions involved in the supply chain are studied. We propose a preselling-based incentive scheme that consists of a pre-ordering contract and a bidirectional compensation contract to motivate the manufacturer to increase production quantity and coordinate the supply chain. Numerical studies are conducted to show the benefit of the preselling strategy.