Penalty and financial assistance in a supply chain with supply disruption |
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| Institution: | 1. Department of Management Science and Engineering, School of Economics and Management, Shanghai Maritime University, Shanghai 201306, China;2. Department of Information Systems and Analytics, Leavey School of Business, Santa Clara University, Santa Clara, CA 95053, USA;3. Department of Marketing, California State University, Long Beach, CA 90840, USA;4. Department of Marketing, Kansas State University, Manhattan, KS 66503, USA;1. School of Engineering and Information Technology, University of New South Wales Canberra, Northcott Drive, Canberra 2600, Australia;2. Department of Mechanical and Materials Engineering, Faculty of Engineering and Built Environment, National University of Malaysia (UKM), 43600 Bangi, Selangor, Malaysia |
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| Abstract: | In a supply chain, when the supply is hit by an unexpected disruption, the supplier may face certain financial difficulty to resume normal production, causing a supply shortage as well as a loss to the manufacturer and the entire supply chain. Combining a penalty term in writing contracts with the provision of financial assistance is the “carrot and stick” approach used by a manufacturer to deal with supply disruption. This article investigates how the manufacturer, in a better financial situation, may use ex-ante penalty terms and ex-post financial assistance to compel the supplier to recover its production capability as much as possible. We find that, the MS (integration of financial assistance and the non-delivery penalty) is the best strategy for the manufacturer in most situations, but it is not a win–win strategy. An interesting result contrary to the conventional wisdom, is that the optimal delivery quantity for the supply chain under the centralized decision-making is less than that under the decentralized decision-making. |
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| Keywords: | Supply disruption Capital constraint Penalty for non-delivery Financial assistance |
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