Optimal financing strategy and contract design of supply chain with yield uncertainty under cap-and-trade regulation

Abstract

Purpose

The purpose of the study is to investigate the financing channels and carbon emission abatement preferences of supply chain members, and further examine the optimal contract design of the retailer.

Design/methodology/approach

This paper develops a low-carbon supply chain composed of one retailer and one manufacturer, in which the retailer provides trade credit to the manufacturer. Considering the cap-and-trade regulation, the manufacturer with uncertain yield makes decision on whether to invest in emission abatement. There are bank loan and trade credit to finance production for the manufacturer and green credit to finance emission abatement investment. Meanwhile, the retailer may provide the manufacturer with three kinds of contracts to improve emission abatement efficiency, namely, revenue sharing, cost sharing or both sharing.

Findings

The results show that the retailer prefers to offer financing service at lower interest rate, but trade (and green) credit financing is always optimal for manufacturer and supply chain. The investment in emission abatement is value-added to all players. The sharing contracts offered by the retailer at lower sharing ratios can realize Pareto improvement of the system regardless of the financing scheme. However, comparing with the revenue or cost sharing contract, the existence of optimal sharing ratios makes the both sharing contract more favorable to the retailer.

Practical implications

The findings provide guidance for the emission-dependent manufacturer in financing and emission abatement decisions, as well as recommendations for the retailer to offer loan service and sharing contract.

Originality/value

This paper integrates green credit into bank loan or trade credit to analyze the financing decision of the manufacturer with uncertain yield and further considers the influence of three kinds of sharing contracts introduced by the retailer on improving operational performance.

Citation

Tang, T., Xu, H., Chen, K. and Zhang, Z. (2024), "Optimal financing strategy and contract design of supply chain with yield uncertainty under cap-and-trade regulation", Kybernetes, Vol. 53 No. 10, pp. 3522-3548. https://doi.org/10.1108/K-02-2023-0226