Journal of Cleaner Production 205 (2018) 407e418

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Journal of Cleaner Production

journal homepage: www.elsevier.com/locate/jclepro

The impact of financing mechanism on supply chain sustainability and

efficiency
Jizhou Zhan a, b, Shuting Li c, Xiangfeng Chen a, *
a
School of Management, Fudan University, Shanghai, China
b
School of Business, Nanjing Audit University, Nanjing, China
c
School of Management, Shanghai University, Shanghai, China

a r t i c l e i n f o a b s t r a c t

Article history: With the growing importance of sustainability for firms to gain a competitive advantage, an increasing
Received 28 May 2018 number of companies have adopted various mechanisms to achieve their sustainability goals. Some firms
Received in revised form have begun to adopt financing mechanisms to encourage the sustainability practice of their suppliers and
15 July 2018
to improve their supply chain efficiency with a different payment term. We consider two financing
Accepted 31 August 2018
Available online 13 September 2018
mechanisms based on practice, namely, the retailer's advanced payment (AP) model in which the
downstream retailer makes an early payment to the upstream supplier within a certain payment term,
and the reverse factoring (RF) model in which the downstream retailer cooperates with and encourages a
Keywords:
Sustainability
bank to offer a loan to the upstream supplier. To illustrate how these mechanisms improve sustainable
Payment term development and supply chain efficiency, we develop a model that explicitly captures the impact of
Advanced payment payment on the sustainability efforts of suppliers in a supply chain and explores the conditions under
Reverse factoring which each financing mechanism benefits the players. We describe the equilibrium strategies between
the supplier and retailer in each financing mechanism, compare the preferences of each player between
the AF and RF models, and find a Pareto zone of a reverse factoring financing plan in which all players
prefer model RF over model AP. We also conduct some numerical experiments to show how the payment
ratio and payment term of model RF affect supply chain sustainability and efficiency.
© 2018 Elsevier Ltd. All rights reserved.

1. Introduction sustainability practices of firms.

Government regulations, customer requirements, and market
competitions increasingly push firms to focus on sustainability
(Tsao et al., 2017). These firms have become mindful of the envi-
ronmental and social impacts of their activities and have adopted
certain practices to reduce their pollution emission and energy
consumption, improve the working conditions and wellbeing of
their employees, and actively involve themselves in social welfare
initiatives (Stindt, 2017). However, the challenges in sustainability
do not merely include environmental problems but also economic
problems from a long-term perspective (Madani and Rasti-Barzoki,
2017). Given that the continuous growth of economies and in-
dustries has tremendous impacts on the environment (Smil, 1993),
new incentive mechanisms must be developed to guide the
* Corresponding author.
E-mail addresses: jzzhan@aliyun.com (J. Zhan), kiko_li@hotmail.com (S. Li),
chenxf@fudan.edu.cn (X. Chen).
Given that firms are involved in supply chains, their sustain-
ability performance is inevitably affected by the behavior of their
suppliers to which they extend their sustainability goals. The
practices of firms in managing the sustainability practices of their
suppliers have been supported by an ample amount of evidence
(Kleindorfer et al., 2005; Wichaisri and Sopadang, 2017). Most of
these firms adopt financing mechanisms to evaluate and monitor
the sustainability performance of their upstream suppliers. Based
on the results of their evaluation, these firms decide whether or not
to continue their sourcing relationship with their suppliers or to
switch to another supplier (Bowen et al., 2001).
In recent years, international companies have started to employ
some innovative financing mechanisms to promote the sustain-
ability of their supply chains. For example, the famous apparel
retailer PUMA adopted two financing mechanisms to influence the
sustainability efforts of its suppliers. On the one hand, PUMA en-
courages the sustainability efforts of its suppliers by adopting the
advanced payment (AP) scheme wherein the suppliers are paid
earlier if they show a high sustainability performance in terms of

https://doi.org/10.1016/j.jclepro.2018.08.347
0959-6526/© 2018 Elsevier Ltd. All rights reserved.
408 J. Zhan et al. / Journal of Cleaner Production 205 (2018) 407e418
environment, health and safety, and social welfare. On the other
hand, PUMA has launched the reverse factoring (RF) program in
cooperation with the International Finance Corporation (IFC) to
promote the sustainability efforts of its suppliers in emerging
markets. In this program, PUMA evaluates the adherence of its
suppliers to certain social and environmental standards, while IFC
offers these suppliers with an individually customized factoring
plan based on the evaluation scores. A higher score corresponds to
a lower financing interest rate (i.e., a larger payment ratio) or an
earlier payment from IFC (Herzogenaurach, 2016). Therefore, both
the AP scheme and RF program offer financial incentives to sup-
pliers to improve their sustainability performance. However,
studies on the effects of financing mechanisms on the sustainability
of supply chains remain scarce (Rajeev et al., 2017).
Several industries have adopted both the AP and RF financing
schemes as innovative supply chain finance approaches to optimize
their capital resources. Motivated by the PUMA's case, we intend to
examine these two financing mechanisms to answer the following
questions: (1) When only one financing mechanism is viable, what
is the equilibrium strategy between the players and under what
condition can each model promote supply chain sustainability and
efficiency? (2) When two financing mechanisms are viable, what is
the preference of each player between model AP and model RF? If a
financing mechanism has a Pareto zone, how can the effect of this
financing mechanism on the sustainability and efficiency of supply
chains be measured?
To answer these questions, we consider a dyadic supply chain in
which the manufacturer decides the sustainability effort and pro-
duces the product to be sold to a retailer. Two financing mecha-
nisms are considered, namely, the AP of the retailer in which the
downstream retailer makes the payment before the end of the sales
season, and the RF program in which the downstream retailer co-
operates with and encourages a bank to offer the upstream supplier
with a low-interest loan. To illustrate how these mechanisms
improve sustainable development, we construct a model that
explicitly captures the impact of payment on the sustainability ef-
forts of suppliers in a supply chain and explores the conditions
under which each financing mechanism benefits the players. The
equilibrium strategies between the retailer and supplier under
different financing mechanisms are then analyzed. By comparing
the profits of each party under two models, we find that the pay-
ment ratio under model RF has a Pareto zone in which all players
prefer model RF over model AP. We also conduct some numerical
experiments to examine the impact of several parameters,
including payment ratio and payment terms, of model RF on supply
chain sustainability and efficiency.
The rest of this paper is organized as follows. Section 2 reviews
the related literature and presents the contributions of this paper.
Section 3 presents the assumptions, notations, and model settings.
Section 4 constructs a model for the AP and RF financing mecha-
nisms, examines the equilibrium strategy between the players
under each mechanism, and analyzes the impacts of different
payment plans on the optimal decision and profit of these players.
Section 5 compares the optimal strategy and profit of each player
under the AP and RF financing mechanisms and reveals the trade-
off condition between these mechanisms on supply chain sus-
tainability and efficiency. Section 6 performs some numerical an-
alyses to verify and extend our theoretical results. Section 7
concludes the paper and presents some potential research oppor-
tunities. The appendix presents the proofs of the propositions.
2. Literature review
Given that this study focuses on sustainability and supply chain
finance, we review these two streams of research as follows.
2.1. Supply chain sustainability
Sustainability means to “meet the needs of the present without
compromising the ability of future generations to meet their own
needs” (Brundtland, 1987). Sustainability is usually operationalized
through the triple bottom line approach, which captures sustain-
ability performance from the economic, environmental, and social
dimensions (Seuring and Müller, 2008). This concept suggests that
firms ``should operate in ways that ensures long-term economic
performance by avoiding short-term behavior that is socially
detrimental or environmentally wasteful” (Porter and Kramer,
2006, p. 82).
The significance of sustainability has been recognized by an
increasing number of firm executives (Lubin and Esty, 2010), and
firms that pursue sustainability are reported to experience
competitive advantages (Hollos et al., 2012). Sustainability imple-
mentation has been examined in many studies, most of which have
focused on internal sustainability practices, such as pollution
emission reduction, energy consumption reduction, product recy-
cling and reverse logistics, or extension of external sustainability
practices including supplier evaluation, supplier selection, and
supplier monitoring (Bowen et al., 2001; Elkington, 1994; Zhu et al.,
2012).
Sustainability has also been applied in supply chain manage-
ment and received much attention from the academia and industry.
Carter and Rogers (2008) defined sustainable supply chain man-
agement (SSCM) as “the strategic, transparent integration and
achievement of an organization's social, environmental, and eco-
nomic goals in the systemic coordination of key inter-
organizational business processes for improving the long-term
economic performance of the individual company and its supply
chains.” SSCM requires a high level of collaboration among supply
chain partners to enhance their operational and sustainable per-
formance. The environmental and social criteria of sustainability
cannot be satisfied by a single firm and require efforts from the
entire supply chain (Bai and Sarkis, 2010). Several studies have also
considered the factors that affect the implementation and perfor-
mance of SSCM practices, such as top management commitment,
government regulations, and collaboration (Ageron et al., 2012;
Gimenez and Tachizawa, 2012; Hollos et al., 2012; Hong et al., 2018;
etc.). Ageron et al. (2012) conducted a survey among French com-
panies to determine the factors (i.e., managerial approaches, bar-
riers, and benefits of sustainable supply management) that
influence SSCM and empirically found that financial barriers have a
greater impact on SSCM than other non-financial barriers. Gimenez
and Tachizawa (2012) found that both supplier assessment and
collaboration positively affect environmental performance and
corporate social responsibility. Hollos et al. (2012) studied the ef-
fects of sustainable supplier cooperation on firm performance by
conducting a survey of Western European firms and found that the
investments in sustainability through sustainable supplier coop-
eration will generate sufficient returns.
Lee and Tang (2018) proposed new OM research directions in
socially and environmentally responsible value chain innovations.
Hong et al. (2018) collected data from 209 Chinese manufacturing
firms and found that the dynamic capabilities of the supply chain
can partially mediate the relationship between SSCM practices and
the economic, environment, and social performance of enterprises.
Some mathematic approaches, such as linear programming, non-
linear programming, and dynamic programming, have also been
used to analyze real case problems in SSCM (Brandenburg et al.,
2014). SSCM has been examined in ample and multidisciplinary
literature and has been extensively reviewed from different aspects
(e.g., Brandenburg et al., 2014; Eskandarpour et al., 2015; Ansari
and Kant, 2017).
 J. Zhan et al. / Journal of Cleaner Production 205 (2018) 407e418
The above studies consider the concept of sustainability and the
factors that impact SSCM practices and performance. Nevertheless,
how the financial flow in the supply chain affects the sustainability
level of firms remains unclear. Accordingly, we construct a model to
investigate the impacts of financing mechanisms on SSCM.
2.2. Supply chain finance
Supply chain finance refers to “the inter-company optimization
of financing as well as integration of financing processes with
customers, suppliers, and service providers in order to increase the
value of all participating companies” (Pflhi and Gomm, 2009). This
area focuses on the capital flow at an inter-organizational level and
is regarded as one of the most important approaches for optimizing
working capital by adopting the solutions provided by financial
institutions, manufacturing firms, or other entities in supply chains
(Gelsomino et al., 2016; Wuttke et al., 2016). The ultimate goal of
supply chain finance is to improve cash flow management by
aligning the product, information, and capital flows within the
supply chain (Camerinelli, 2009; Deboer et al., 2015; Hofmann,
2005; Lamoureux and Evans, 2011; Wuttke et al., 2013).
Some supply chain finance initiatives include buyer credit,
inventory/work-in-progress financing, trade credit, RF, electronic
platforms, letters of credit, open account credit, bank loan, and
early payment discount (Wuttke et al., 2013). For instance, if the
downstream retailer is facing a capital dilemma, then this retailer
can either be financed through trade credit (i.e., delay payment)
from the supplier or get an inventory pledge from the bank. If the
upstream supplier is facing financial troubles, then this supplier can
choose between receiving an advanced payment from the retailer
and reversing its factoring financing service from a bank. In this
work, we consider the cash turnover of the supplier and investigate
the payment plan of the retailer (i.e., AP or RF). Accordingly, we
review the related work on AP and RF as follows.
2.2.1. AP of retailers
In practice, the supplier usually encourages the retailer to adopt
AP by offering a discount on the offered wholesale price. For
example, a two-part trade credit contract, “2/10 net 30” gives
retailer a 2% discount if its pays within 10 days of delivery; other-
wise, the retailer pays without discount between 11 and 30 days.
Such contract is characterized as a two-part payment plan ðb=M1 ;
n=M2 Þ, under which the retailer is offered a cash discount of b% if
the full purchase cost is paid within a certain time M1 . Otherwise,
the retailer must pay the purchase cost within a certain payment
term M2 (Ng et al., 1999). Based on this two-part payment contract,
Zhong and Zhou (2012) examined the optimal ordering strategy of
the retailer and the trade credit policy of the supplier and measured
the effect of this contract on reducing the operating cost of the
supplier. Furthermore, Zhou et al. (2013) considered a flexible pay-
ment contract under which the retailer can pay l% of the total
purchase cost with a discount of b% before the time M1 and then pay
off the remaining 1  l% percent of the total purchase cost by time
M2 . Based on the flexible payment scheme, they developed a model
for the optimal replenishment policy and payment plan of the
retailer. Yang et al. (2016) extended the two-part contract ðb=M1 ; n=
M2 Þ to a general contract ðl=T; MÞ, under which the retailer can
flexibly choose to make an early payment T before the due date M
and enjoy a discounted wholesale price with l that is related to its
early payment time. They also developed a continuous newsvendor
model to analyze the decisions made under a flexible trade credit
and showed that such flexible payment contract can improve the
decentralized supply chain efficiency and decrease the trade credit
risk of the supplier. With an early payment discount trade credit
contract, Kouvelis and Zhao (2018) studied the impact of the
409
differential credit ratings of the supplier and retailer on the opera-
tional and financial decisions in the supply chain. They found that if
the credit rating of the supplier exceeds a certain threshold, then the
supplier will offer a trade credit to the retailer with a zero interest
rate; otherwise, the supplier will charge the retailer a positive in-
terest rate, while the retailer will be financed by a combination of
bank loans and trade credits. These studies indicate that the supplier
offers a cash discount to encourage the retailer to pay the purchase
cost at an earlier time, and if the retailer adopts AP, then its risk of
trade credit is reduced. Unlike previous studies, we discuss the
initiative role of AP in encouraging the supplier to devote itself in
improving supply chain sustainability. With an early payment, on
the one hand, the retailer incurs cash cost and loses some invest-
ment opportunities from the collected revenue. On the other hand,
the AP stimulates the supplier to improve supply chain sustain-
ability and increases the order quantity of the retailer. Therefore, we
analyze two opposite effects of AP on the decisions of each player
and on the sustainability and efficiency of the supply chain.
2.2.2. RF
As an initiative in supply chain finance, RF is a financial
arrangement that helps a firm pay in advance its trade credit ob-
ligations to its suppliers (Vliet et al., 2015). As a development of
conventional factoring with which a firm sells its accounts re-
ceivable due from its customer to a third party financial service
company that later collects the accounts receivable from the
customer, RF reduces the risks and costs associated with asym-
metric information (Klapper, 2006). By motivating the extension of
payment terms, RF is adopted by large firms to improve the cash
flows of their suppliers and to secure a stable supply. This
arrangement also triggers affordable financing for small- and
medium-sized enterprises (SMEs) (Tanrisever et al., 2015).
The RF mechanism has been explored in previous studies,
among which, Tanrisever et al. (2015) investigated the impact of RF
on operational decisions and found that RF generates value and is
affected by the spread in external financing costs, the extension of
the payment period, the operational characteristics of SMEs (i.e.,
volatility in their cash flows and working capital policy), and the
risk-free interest rate. Vliet et al. (2015) performed simulation
optimization to explore the effect of payment extension on RF and
found that such extension produces a non-linear cost for suppliers.
By adopting a game-theoretical model, Tunca and Zhu (2017) found
that RF, as a buyer-intermediated financing mechanism, contrib-
utes to improvements in channel performance.
Unlike previous studies, this paper analyzes how the retailer
uses the RF supply chain financing scheme to improve its supply
chain sustainability. We also examine the impact of RF contract on
the optimal effort level of a supplier in a sustainable supply chain
and show that the RF with a suitable payment term or payment
ratio for the full purchase cost of the retailer not only relieves the
cash turnover dilemma of the supplier but also improves the sus-
tainability and efficiency of the supply chain.
The interface of supply chain finance and sustainability has
recently received the attention of scholars. Mani et al. (2018)
examined the impact of the social sustainability of the supplier on
supply chain performance from an emerging economy perspective
and proposed that the improved supplier social sustainability
practices can lead to an improved supply chain performance
through the mediating role of supplier performance. Sarkar et al.
(2018) explored the impacts of variable carbon emission costs and
multi-delay in-payments on a global sustainable supply chain and
found that implementing multi-level trade credit under a single-
setup multiple delivery setting positively affects the economic and
environmental performance of a three-level supply chain. Zhao et al.
(2018) examined the relationship between the capital constraints of
410 J. Zhan et al. / Journal of Cleaner Production 205 (2018) 407e418
the retailer and the product greenness design of the manufacturer
and found that deferred payment encourages the retailer to increase
its order quantity and improves the profit, overall supply chain ef-
ficiency, and product greenness of the manufacturer. Zhou et al.
(2018) conducted an in-depth case study to investigate the supply
chain finance practices of Alibaba, the largest online platform
company in the world, and found that supply chain finance can
present firms with a financial approach to promote their agricultural
sustainability. Unlike these studies, we build a model that explicitly
captures the impact of payment on the sustainability effort of a
supplier in a supply chain and explores the conditions under which
each financing mechanism benefits the players.
This study contributes to the literature in several aspects. First,
while previous studies on sustainability have mainly focused on the
evaluation or monitoring of suppliers, we build a new model to
introduce the role of financing mechanisms in promoting supply
chain sustainability and efficiency. Second, previous studies on
supply chain finance have mainly focused on the optimal financing
strategy for relieving the capital constraints and improving the
profits of the supply chain yet have largely ignored the sustain-
ability of the supply chain. Our research enriches the supply chain
finance literature by examining how financing schemes promote
supply chain sustainability. Third, most studies have examined the
equilibrium financing strategies of trade credit and bank loans yet
only few have examined how the payment term of the retailer af-
fects the optimal financing strategy.
3. Model set-up
We consider a two-echelon supply chain with one supplier
(denoted by S, referred herein as “he”) and one retailer (denoted by
R, referred herein as “she”) who buys a single type of product from
the supplier. The retailer only has one chance to purchase, and her
order can be paid either to the retailer under the AP mode or to the
bank under the RF mode. We study the equilibrium strategies be-
tween the supplier and retailer under a Stackelberg game where the
supplier acts as the leader who decides the level of effort in supply
chain sustainability while the retailer acts as the follower who ap-
plies her ordering strategy and decides whether or not to accept the
RF service offered by the bank. Sustainability effort refers to the
effort of suppliers to improve their sustainability performance,
including their environmental, social, and economic performance.
To analyze the impact of the sustainability effort of the supplier
on the product demand, we assume an uncertain market demand
D ¼ yðeÞ þ ε, and yðeÞ ¼ a  bexpð  eÞ, where a is the maximum
demand in the market, b is the elasticity coefficient of effort e to the
demand, and ε is a random variable defined in ½yðeÞ; þ∞Þ that has
a probability density function of f ðxÞ and cumulative distribution
function of FðxÞ, and FðxÞ ¼ 1  FðxÞ. The expected value of ε is zero,
and a similar demand function can be found in Zhou et al. (2017)
and Tsao et al. (2017), etc. Consequently, a higher sustainable
effort may occur with a higher product demand.
As mentioned in Section 1, the retailer can employ the RF model
to improve the efforts of the supplier in sustainable development
and to enhance the final production demand. To measure the ef-
fects of this model on supply chain sustainability, we regard AP
model as a benchmark model in which the retailer pays the sup-
plier within a certain payment term, which can affect the effort
level of the supplier in sustainability.
Unlike previous studies, we inspect the equilibrium strategies in
these two models by accounting for the time value of money or the
opportunity cost in our model framework. As shown in Fig. 1,
ordering occurs at time epoch O, and T is the end of sales season
when the retailer collects the revenue from the consumers. Under
model AP, the retailer must pay the supplier at time epoch V, while
Fig. 1. The sales season and payment epoch.
under model RF, the external bank offers a discount payment to the
supplier at time epoch G. The lead time between O and T is l0 , the
time between O and V is lr , and the time between O and G is lb . For
simplicity, we assume that the lead times are fixed and exogenous.
Without loss of generality, we assume l0  lr  lb .
We also compare the present cash values of each player at epoch
T under both models. Let pkj be the present value of the expected
profit of player j under model k at epoch T, where j ¼ S; R; B
represent the supplier, retailer, and bank respectively, and
k ¼ AP; RF denote models AP and RF, respectively. For simplicity,
neither goodwill cost nor salvage cost is considered in our model.
See Table 1 for a summary of notation.
4. Equilibrium analysis
In practice, models AP and RF are the main finance mechanisms
for the retailer to promote supply chain sustainability. To inspect
how each financing mechanism theoretically affects supply chain
sustainability and efficiency, we examine the equilibrium strategies
between the supplier and retailer under each model and study the
necessary conditions for each financing mechanism to promote
supply chain sustainability and efficiency. In this section, we firstly
examine the equilibrium and relative conditions for model AP
before those for model RF.
4.1. Model AP
In model AP, the retailer is permitted to pay with an ex-ante
term lr . The sequence of events is outlined as follows. At time O,
the supplier endeavors to achieve or promote supply chain
Table 1
List of notation.
Decision variables
ek The effort that supplier inputs to improve supply chain sustainability under
the case of k.
Qk Retailer's order quantity under the case of k.
Script
k k ¼ AP; RF denotes that advanced payment and reverse factoring
respectively.
j j ¼ S; R; B denotes supplier, retailer and bank respectively.
Parameters
a The maximum demand in sales market ða > 0Þ.
b The elasticity of effort on sustainable supply chain to market demand ðb > 0Þ.
e Supplier's effort on promoting the sustainability of supply chain ðe  0Þ.
p Retailer's selling price.
w Supplier's selling price.
cp Production cost per unit for the supplier.
ce Supplier's cost per unit for inputting every effort in sustainable supply chain.
l0 The lead time of sales season.
lr Retailer's payment time between epoch O and V.
lb Bank's payment time between epoch O and G.
Ij Player j's unit cash opportunity cost.
rRF Financing interest rate of reverse factoring ð0  rRF  1Þ.
l The ratio of accounts receivable that bank pays to supplier ðl ¼ 1  rRF Þ.
pk Player j's profit under the case of k.
j
 J. Zhan et al. / Journal of Cleaner Production 205 (2018) 407e418 411

"
sustainability, while the retailer identifies her order quantity ½ce ð1þIs l0 Þ2
immediately. At time V, the retailer pays off the purchase to the and x6 ¼ wIs a þ z*AP  wð1þIs ðl0 lr ÞÞcp ð1þIs l0 Þ
, we have
supplier, therefore, the payment lead time of the retailer is lr . At the
vpAP* vpAP*
end of the sales season, the demand is realized and the retailer Corollary 2. (1) vlR  0 when x3AP* x4 ; Otherwise, R
vlr
> 0. (2)
vpAP*
x5  x6 ; Otherwise, vpvlS > 0.
r
generates revenue. Following Chen et al. (2017), we employ 1 þ Ij l S
vl
 0 when
r r
to replace ð1 þ Ij Þl to calculate the current money value. When the
In Corollary 2, x3 is the gain of the retailer from each increase in
retailer pays at time V, she expends a chance cost of
unit payment lead time lr , while x4 is the loss of per unit lr due to
wQAP ½1 þ Ir ðl0  lr Þ at time T, and her expected profit is
the decreasing effort of the supplier. If and only if x3 > x4 , pAP*
R in-
creases with lr , then an extended payment term lr has a two-fold
pAP
R ¼ pEminðx; QTC Þ  wQTC ½1 þ Ir ðl0  lr Þ (1) effect on the profit of the retailer. On the one hand, a longer lead
Meanwhile, the problem of the supplier is time increases the order quantity of the retailer from an uncertain
market and subsequently increases the revenues from the sales

 market, while the payment term provides the retailer with a capital
pAP
S ¼ wQAP ½1 þ Is ðl0  lr Þ  cp QAP þ ce eAP ð1 þ Is l0 Þ (2)
opportunity profit. In this case, the payment lead time lr has a
By adopting a backward induction approach, the equilibrium positive effect on the profit of the retailer. On the other hand, the
decisions and profits of these players are characterized in the delayed payment takes up the capital cost of the supplier, which
following proposition: decreases his effort level in promoting supply chain sustainability
and reduces the order quantity of the retailer. Thus, if lr is large to
Proposition 1. Under model AP, the supplier's optimal effort level is
  some extent, then the payment term may not benefit the retailer.
b½wð1þIs ðl0 lr ÞÞcp ð1þIs l0 Þ
e*AP ¼ ln ce ð1þIs l0 Þ
, and retailer's ordering decision is As for the supplier, x5 implies the earnings from the increased
  order quantity of the retailer and x6 implies the expenditures in
ð1þIs l0 Þ 1 wð1þIr ðl0 lr ÞÞ
Q *AP ¼ a  wð1þI ðlcel ÞÞc ð1þI l Þ
þ F p . promoting sustainability. Therefore, if x5  x6 , then the supplier
s 0 r p s 0
will permit the retailer to pay off the order at epoch V. Therefore,
Proposition 1 shows the optimal effort level of the supplier in given a suitable term lr , the supplier may benefit from the payment
promoting the sustainability of the supply chain and the ordering schedule of the retailer.
decision of the retailer under AP. Given the opportunity cost of As mentioned in Corollaries 1 and 2, the retailer can employ
capital, both the optimal effort of the supplier and the optimal or- model AP as a financing mechanism to promote supply chain sus-
der quantity of the retailer correlate with lr . If lr ¼ 0, that is, the tainability by reducing the payment lead time. However, a reduced
retailer pays off the purchase at the ordering time, then the supplier payment lead time can increase the capital cost of the retailer for
does his best to promote supply chain sustainability. Meanwhile, if supply chain operations and subsequently reduce her order
lr ¼ l0 , then the supplier spends the largest capital cost and his quantity.
efforts in promoting supply chain sustainability, which will be To illustrate the effect of lr on the decision and profit of each
reduced to its lowest level. player, we assume that p ¼ 100; w ¼ 40; cp ¼ 20; ce ¼ 5, a ¼ 100;
  b ¼ 9; the product is sold out after l0 ¼ 100 days, that the unit cash
1 wð1þIr ðl0 lr ÞÞ
Let z*AP ¼ F p , retailer's expected profit and opportunity cost of the supplier and retailer are Is ¼ 0:01 and
Ir ¼ 0:005 respectively, and that ε conforms to the normal distri-
supplier's profit are as follows
bution N (0,2). Fig. 2(a) shows the decreasing effect of lr on the
*
strategy of the supplier for promoting supply chain sustainability,
ZzAP when lr  98 days, he is unwilling to contribute to sustainability
pAP*
R ¼ ½p  wð1 þ Ir ðl0  lr ÞÞQ *AP p FðxÞdx: (3) improvement. Meanwhile, Fig. 2(b) shows that when the retailer
z*AP Q *AP
pays off her purchase within 50 days, the optimal order quantity
Q *AP increases along with the payment lead time lr , and decreases
  along with lr when lr > 50 days. Fig. 3 plots the impact of term lr on
pAP*
S ¼ wð1 þ Is ðl0  lr ÞÞ  cp ð1 þ Is l0 Þ Q *AP  ce e*AP ð1 þ Is l0 Þ: the profits of these two players. As shown in Fig. 3, the profit of the
(4) supplier decreases along with lr , and given lr ¼ 91 days, the retailer
has an optimal expected profit under her advanced payment plan.
s ce ð1þIs l0 Þ
Let x1 ¼ wIr
pf ðz*AP Þ
, x2 ¼ ½wð1þI wI 2 , we have
s ðl0 lr ÞÞcp ð1þIs l0 Þ
*
veAP vQ *AP 4.2. Model RF
Corollary 1. (1) vlr
< 0; (2) vl  0 when x1  x2 , otherwise,
vQ *AP r

vlr
> 0.
Corollary 1 shows that the optimal effort of the supplier decreases
along with the payment lead time of the retailer. If the retailer performs
a traditional payment with a longer time, then the supplier will incur a
higher capital cost that impels him to reduce his efforts in promoting
supply chain sustainability. However, for each increasing payment term
lr , x1 implies an increment in the order of the retailer from the stochastic
market, while x2 implies a decrement in orders due to the low effort of
the supplier. Therefore, the optimal ordering decision of the retailer is a
trade-off between two opposite effects from payment lead time lr .
Specially, if x1  x2 , then the optimal order quantity will decrease, but if
x1 > x2 , then the order quantity will increase.
 
Also, we denote ð1þIs l0 Þ
x3 ¼ wIr a þ z*AP  wð1þI ðlcel
ÞÞc ð1þI l Þ
In this section, we examine the equilibrium choices for each
member in the supply chain under model RF. The sequence of
events is described as follows. At time O, the supplier, retailer and
bank sign a RF contract. The supplier then shows an effort level eRF
in promoting supply chain sustainability, while the retailer makes
her ordering decision and order quantity QRF . At time G, the bank
pays the accounts receivable wQRF to the supplier and deducts the
RF financing cost rRF wQRF . At the end of sales season, the demand is
realized and the retailer checks the account and delivers her pay-
ment for the order to the bank. Thus, the ordering decision of the
retailer is
pRF
R ¼ pEminðD; QRF Þ  wQRF : (5)
s 0 r p s 0

and x4 ¼ wIs ce ð1þIs l0 Þ½pwð1þIr ðl0 lr ÞÞ

½wð1þIs ðl0 lr ÞÞcp ð1þIs l0 Þ2
, x5 ¼ wIr ½wð1þIs ðlpf0 l r ÞÞcp ð1þIs l0 Þ
ðz* Þ AP
412 J. Zhan et al. / Journal of Cleaner Production 205 (2018) 407e418

Fig. 2. The impact of lr on each player's equilibrium decision.

supplier and motivates him to increases his efforts in promoting

supply chain sustainability. The retailer has no capital cost under
model RF. Therefore, a highly sustainable supply chain encourages
 
the retailer to increase her order quantity.
1 w
Let z*RF ¼ F p , we have the profit of each player under model
RF as following.

*
ZzRF
wÞQ *RF
*
pRF
R ¼ ðp  p FðxÞdx: (7)
z*RF Q *RF


¼ lw½1 þ Is ðl0  lb ÞQ *RF  cp Q *RF þ ce e*RF ð1 þ Is l0 Þ:
*
pRF
S (8)

* *
pRF
B ¼ ½1  lð1 þ Ib ðl0  lb ÞÞwQ RF : (9)
wð1þIs ðl0 lb ÞÞcp ð1þIs l0 Þ½1þIb ðl0 lb Þ
Let h1 ¼ wce ð1 þ Is l0 Þ , h2 ¼ w½1 þ
½lwð1þIs ðl0 lb ÞÞcp ð1þIs l0 Þ2 "
Fig. 3. The impact of lr on each player's profit.
Ib ðl0  lb Þða þ z*RF Þ.And lb2 ¼ l0 þ 1
Is 
1
lwIs cp ð1 þ Is l0 Þ þ
rffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi #
and the profit of the supplier is ce ð1þIs l0 Þ½ðlwcp ð1þIs l0 ÞÞIb þð1lÞwIs 
I ðaþz* Þ
. We examine the impact of l and


b RF

pRF
S ¼ lwQRF ½1 þ Is ðl0  lb Þ  cp QRF þ ce eRF ð1 þ Is l0 Þ: (6) lb in model RF on each player's profit as following corollary.
* * *
vpRF vpRF vpRF
Corollary 4. (1) Given a lb ; R
vl
> 0; S
vl
> 0; (2) B
vl
 0 if and
* *
vpRF vpRF
Proposition 2. Under RF, supplier's optimal effort level to sustain- only if h1  h2 ; (2) Given a l; R
vlb
< 0, S
vlb
< 0; If lb  minðlr ;lb1 Þ, then
  * *
b½lwð1þIs ðl0 lb ÞÞcp ð1þIs l0 Þ vpRF vpRF
able supply chain is e*RF ¼ ln , and retailer's B
vlb
 0, else if lr  lb > lb1 , B
vlb
< 0:
ce ð1þIs l0 Þ
 
1 w Corollary 4 shows that under model RF, the profit of each player
ordering decision is Q *RF ¼ a  lwð1þI ðlce ð1þI s l0 Þ
l ÞÞc ð1þI l Þ
þF p .
s 0 r p s 0 depends on two parameters, namely, payment term lb and payment
Proposition 2 shows that under RF, both the effort level and ratio l. Given a payment term lb (or payment ratio l), if the bank
optimal order quantity of the retailer are dependent on the bank's pays a larger percentage l of the total purchase cost of the retailer
payment ratio of accounts receivable l and time of payment lb . Also, (or pays within an earlier term lb ) in the RF contract, then the profit
we conclude the impact of l and lb on e*RF and Q *RF in the following of both the retailer and supplier increases. When combined with
corollary. Corollary 3, the RF scheme with a larger payment percent l or a
ve*RF vQ *RF ve*RF vQ *RF shorter payment term lb can motivate the supplier to dedicate more
Corollary 3. (1) vl
> 0, vl
> 0; (2) vlb
< 0, vlb
< 0.
effort in promoting supply chain sustainability, which will subse-
Corollary 3 shows that given its fixed payment epoch lb , if the quently increase the order quantity of the retailer and generate
bank commits to pay a higher ratio of the accounts receivable of the higher profits for either the retailer or supplier. However, under
retailer's order (i.e., the financing cost of RF is relatively low), then model RF, the bank generates profit from the balance between the
the supplier is motivated to show more effort in promoting the incoming payment of the retailer wQ *RF and the factoring expen-
sustainable development of supply chain and the retailer subse- diture lwQ *RF ð1 þ Ib ðl0  lb ÞÞ. To examine the impact of the RF
quently increases her order quantity. Given the chance of capital contract on the profit of the bank, we use h1 to denote the profit
investment and a certain financing interest rate rRF (or payment from the increased order quantity of the retailer and h2 to denote
ratio l), an earlier payment accelerates the capital turnover of the the expenditure under RF. Therefore, the impact of l on the profit of
 J. Zhan et al. / Journal of Cleaner Production 205 (2018) 407e418
the bank is computed as the trade-off between the two opposite
effects of h1 and h2 . If h1  h2 , then the profit of the bank increases
along with l. Otherwise, the profit decreases along with l. From
Corollary 4, we can observe that given a l, an earlier payment is
more favorable for the supplier and retailer and may not necessarily
reduce the profit of the bank. If the payment term is short (i.e., lb 
minðlr ; lb1 Þ), then the increased order quantity of the retailer will
lead to a larger profit for the bank. Meanwhile, if the bank pays the
supplier after some duration threshold lb1 , then its profit decreases
along with lb . Therefore, a suitable RF contract can benefit both
players in the supply chain and the bank that provides a RF
financing service to the upstream firm.
Model RF also plays an important role in motivating the retailer
to promote supply chain sustainability and efficiency. Unlike model
AP, model RF offers the retailer and bank with an opportunity to
cooperate by adjusting either the payment ratio of the latter (e.g.,
loan interest) or the payment lead time lb .
5. Comparison between models AP and RF
When two financing mechanisms are viable, both the retailer
and supplier must determine the best between these mechanisms.
To examine this point, we initially compare individual profit under
both financing equilibrium and then examine the conditions under
which model RF outperforms model AP. Afterward, we consider the
preferences of all players under model RF and examine whether
this model has a Pareto zone in which all players generate high
profit.
By comparing the optimal effort level and the ordering decisions
of the retailers under the two modes from Propositions 1 and 2, we
ðcp þce =bÞð1þIs l0 Þ
denote that l1 ¼ w½1þIs ðl0 lb Þ
, l2 ¼ 1þI
* *
1þIs l0

cp ðzRF zAP Þ½wð1þIs ðl0 lr ÞÞcp ð1þIs l0 Þþwce ð1þIs ðl0 lr ÞÞ
w½1þIs ðl0 lb Þ ce ð1þIs l0 Þðz*RF z*AP Þ½wð1þIs ðl0 lr ÞÞcp ð1þIs l0 Þ
derive the following lemma.
Lemma 1. (1) If l  maxðl1 ; l2 Þ, then e*RF  e*AP > 0. (2) If l  l3 ,
then Q *RF  Q *AP :
From Lemma 1, when the bank has a large financing ratio to
some extent (i.e., the financing interest rate is lower than a certain
threshold), the supplier devotes much effort in improving supply
chain sustainability, which will increase the order quantity of the
retailer. Especially, with l ¼ 1, which implies the financing cost of
RF is zero (i.e., rRF ¼ 0), the bank will offer the supplier the account
receivable for the retailer's order, and then the supplier shows
initiative in promoting supply chain sustainability.
5.1. Individual profit
In this subsection, we compare the profits of the retailer, sup-
plier, and bank under two financing mechanisms and highlight the
conditions under which the model RF is preferred over model AP.
5.1.1. The retailer
In traditional transactions between the vendor and buyer, both
parties jointly decide upon the payment time. Despite its benefits
to the buyer, a long payment lead time reduces the efforts of the
supplier in promoting supply chain sustainability and conversely
limits the optimal equilibrium ordering decision of the retailer.
Meanwhile, under model RF, the retailer can further defer her
payment until the end of the sales season, and the factoring pay-
ment from the bank will impel the supplier to contribute to sus-
tainability improvement. Therefore, we explore whether model RF
outperforms model AP for the retailer and come up with the
following proposition.
413
* *
Proposition 3. If l  maxðl1 ; l2 Þ, then pRF R  pR .
AP
Proposition 3 shows that if model RF can encourage the supplier to
increase its efforts in promoting supply chain sustainability, then the
retailer can gain more profit from the RF plan. In fact, the retailer has
no capital chance disbursement under model RF and can increase its
sales amount in the consumer market. Combined with Lemma 1, if l
reaches some threshold (i.e. l  maxðl1 ; l2 Þ), then the bank commits
itself to providing a large part of the accounts receivable (for example,
a bank can offer at least 70% of the receivable cash to the supplier) and
the retailer would rather use RF to conduct its transactions with the
supplier and expand its sales scale in the market.
5.1.2. The supplier
Under model AP, a long payment lead time lr increases the order
quantity of the retailer and further enhances the selling amount of
the supplier. However, a high percentage of accounts receivable
takes up the current cash flow of the supplier and restrains its in-
vestment in sustainable production. Given that most of the large
shareholders are engaged in buyer-vendor businesses, many sup-
pliers are facing the capital turnover problem. To address this
problem, RF can activate the liquidity turnover of the firm, and a
timely payment with some percentage of the retailer's total pur-
chase cost from the bank will enable the supplier to engage in
sustainable production. Therefore, we also examine how model RF
outperforms model AP for the supplier. By comparing the profit of
*
the supplier in Propositions 1 and 2, let GðlÞ ¼ pRF AP *
S  pS , and le
solves the equation of GðlÞ ¼ 0, we obtain the following
proposition.
* *
Proposition 4. pRF S S with le  l  1.
 pAP
1þIs ðl0 lr Þ Proposition 4 shows that given a payment term lb , a suitable
s ðl0 lb Þ
, and l3 ¼ payment ratio of accounts receivable in the RF contract will benefit the
, we can supplier. Specifically, if the payment ratio is l ¼ 1 under RF, then the
bank will incur no costs. Given that the payment of the bank predates
that of retailer (i.e. lb  lr ), the supplier receives a lower current
occupied fund under model RF than under model AP. From another
perspective, the retailer uses RF to encourage the supplier to show
more efforts in promoting supply chain sustainability, thereby
increasing her order quantity. Therefore, RF activates the cash flow of
the supplier and helps him contribute to supply chain sustainability. In
this case, the bank must devise an RF scheme with an appropriate ratio
l  le that will be available for the supplier.
5.1.3. The bank
Under model RF, the bank receives the payment of wQ *RF from
the retailer at the end of the sales season and pays the account of
lwQ *RF to the supplier at the term of lb . Therefore, the capital cost is
lwQ *RF Ib ðl0  lb Þ. If the bank does not offer a RF service to the
supplier, its profit can be determined as follows.
pB ¼ lwQ *RF Ib ðl0  lb Þ: (10)
Compare the bank's profit in Eq. (9) and Eq. (10), we can
investigate how the RF service creates the value for the bank. The
following proposition shows the condition under which the bank is
willing to provide the RF service.
*
Proposition 5. If l  1þ2I 1ðl , then pRF
B  pB .
b 0 lb Þ
Proposition 5 shows that considering the capital opportunity
cost and given the payment term lb , the bank prefers to offer RF to
the supplier only when the payment ratio l does not exceed a
certain level. With a decreasing lb , which implies that the supplier
requires a faster turnover of capital, a lower percentage of accounts
receivable may be given to the supplier. Meanwhile, if the capital
opportunity cost Ib is high, then the bank must reduce the payment
414 J. Zhan et al. / Journal of Cleaner Production 205 (2018) 407e418

ratio of the accounts receivable.

5.2. Pareto zone of model RF

After comparing the profits of each participant under models AP

and RF, we examine whether RF is Pareto beneficial for each player
in the supply chain and check how RF helps all players attend to the
sustainable development and operations in the supply chain. Given
that the parameters lb and lr are exogenous variables, the following
proposition characterizes the Pareto zone of l in which RF out-
performs AP for each participant in the supply chain.
Let l ¼ maxfl1 ; l2 ; le g and l ¼ 1þ2I 1ðl l Þ, we have
b 0 b

hProposition
i 6. Given a lb , if l  l, there exists a Pareto zone of l (i.e.,
l; l ), in which Model RF outperforms Model AP for both supplier,
retailer and the bank in sustainable supply chain.
Proposition 6 shows that given a payment term lb , the bank can
offer a suitable payment ratio l to the supplier in order for each player
in the supply chain to gain more profit under model RF than under
model AP. In the Pareto zone of l, RF plays a significant role in
Fig. 4. The impact of l on supplier's effort level and retailer's ordering decision.
encouraging the supplier to invest more efforts in promoting supply
chain sustainability and efficiency. Meanwhile, based on the correla-
e*AP ¼ 2:7568, while the order quantity of the retailer is Q *AP ¼
tion between l and lb , we observe a Pareto zone of lb in which RF
99:7813. Consistent with Corollary 3, Fig. 4 shows that under
outperforms AP for each member in the supply chain.
model RF, both the optimal effort level e*RF and order quantity Q *RF
Denote leb solves the equation pRF
*
AP * ¼ 0, and let l
S  pS b1 ¼ l0  increase along with l. Given lb ¼ 15 < lr ¼ 45, and if l  0:7796,
1l, l 1þIs ðl0 lr Þl ðcp þce =bÞð1þIs l0 Þlw
2lIb b2
¼ l0  l Is , lb3 ¼ l0  lwIs , and lb ¼ lb1 , then e*RF  e*AP , the supplier will commit himself to promoting
lb ¼ minðlb2 ; lb3 ; leb ; lr Þ, we have supply chain sustainability. However, if l  0:8325, then the
retailer will make a larger order under model RF than under model
Proposition 7. Given a l, if lb  lb , there exists a Pareto zone of AP. Thus, Lemma 1 is exemplified. Moreover, if RF encourages the
 
supplier to devote himself in promoting a sustainable supply chain,
lb (i.e., lb ; lb ), in which Model RF outperforms Model AP for both
then this scheme also increases the order amount of the retailer.
supplier, retailer and the bank in sustainable supply chain. Fig. 5 shows how the payment ratio l affects the profit of each
participant under RF. To compare the value that RF creates for every
As shown in Proposition 7, if the bank offers a fixed payment
participant, we compute the profit of the retailer and supplier
ratio to the supplier (i.e., the financing rate rRF in RF is a fixed * *
under the AP mode, that is, pAP
R ¼ 5588:9 and pAP
S ¼ 1374:9: Fig. 5
constant), then a payment term lb that is neither too large nor too
shows that the profit of the retailer and supplier increases while
small in the RF contract will increase the efforts of the supplier in
that of the bank decreases with l, thereby exemplifying Corollary 4.
promoting supply chain sustainability. All parties also gain a higher
In other words, with l2½0:8;0:9207, the RF mode is more favorable
profit under model RF than under model AP.
for the retailer, supplier, and bank than the AP mode, thereby
Under model AP, the retailer can motivate the supplier to engage
verifying the existence of Pareto zone of l in Proposition 6.
in sustainable production or development. However, the RF plan
with suitable parameters (l and lb ) will lead to greater improve-
ments in supply chain sustainability and efficiency. To examine the
6.2. The impact of payment term under RF
evolution of the Pareto zone of l (or lb ) with lb (or l), we conduct
some numerical experiments in the next section.
By using the same exogenous variables described in Section 6.1

6. Numerical analysis

In this section, we present some numerical examples to verify

and extend the results of our analysis and to illustrate the impacts
of payment ratio l and payment term lb on the effort level of the
supplier in promoting supply chain sustainability, the order strat-
egy of the retailer, and the profits of each participant in the supply
chain under different financing mechanisms.

6.1. The impact of payment ratio under RF

We set the exogenous variables as

a ¼ 100; b ¼ 9; p ¼ 100; w ¼ 40; cp ¼ 20; ce ¼ 5 and the sales
season is l0 ¼ 60 days. The order is paid off within lr ¼ 45 days
under AP scheme of the retailer and within lb ¼ 15 days under the
RF scheme. The capital cost rate of the retailer, supplier and bank is
Ir ¼ 0:005, Is ¼ 0:008 and Ib ¼ 0:001, while the stochastic demand
is D ¼ a  b expð  eÞ þ ε, where ε conforms to a standard normal
distribution N (0,1). Under model AP, the optimal effort level is Fig. 5. The impact of l on each player's profit.
 J. Zhan et al. / Journal of Cleaner Production 205 (2018) 407e418
Fig. 6. The impact of lb on optimal effort level and retailer's ordering decision.
Fig. 7. The impact of lb on each player's profit.
except for l ¼ 0:9 and by assuming that lb changes within the range
of ½0; lr , we analyze the sensitivity of lb to the strategy and profit of
each player under models AP and RF.
Fig. 6 plots the influence of the payment lead time of the bank lb
on optimal effort level e*RF and order quantity Q *RF . Both e*RF and Q *RF
decrease along with lb , thereby verifying Corollary 3. If the retailer
pays off her purchase within lr ¼ 45 days, then she will make a
larger order quantity under RF when the bank pays within lb  28
days. Meanwhile, the supplier is motivated to increase its efforts in
promoting supply chain sustainability when the bank pays within
lb  37 days. Given l ¼ 0:9, the RF with an earlier payment scheme
will increase the efforts of the supplier in promoting supply chain
sustainability and increase the order quantity of the retailer.
Fig. 7 compares the profit of each player under models RF and
AP. Either the retailer or supplier earns less with lb , while the bank
increases its profit with lb . Given l ¼ 0:9 in the RF contract, Fig. 7
Table 2 h i
The impact of lb on the Pareto zone l ; l where model RF outperforms model AP.
lb
0 5 15
[0.7375,0.8931] [0.7546,0.9056] [0.8000,0.9207]
Note: represents there exists a null Pareto zone that model RF outperforms model AP.
415
shows the existence of the Pareto zone of lb under the equilib-
rium payment modes. If the bank commits to pay off the order of
the retailer to the supplier within lb 2½4; 34 days, then each
participant would rather accept the RF contract than the AP of the
retailer. However, the final payment term lb is dependent on the
bargaining power of the bank and supplier. For example, suppose
that the bargaining power of the bank is d ð0  d  1Þ and lb can be
written as 34d þ 4ð1  dÞ ¼ 4 þ 30d. Therefore, the larger d is, the
more payoff the bank receives. Proposition 6 is hence exemplified.
We also explore the impact of lb on the evolution of the Pareto
zone of l in Table 2 and the impact of l on the evolution of the
Pareto zone of lb in Table 3. As shown in Table 2, both l and l in-
crease along with lb , and the Pareto zone of l narrowly increases
with lb . Therefore, if the bank has a long payment period lb that is
close to lr (lr ¼ 45 days in the numerical experiments), then the
bank must pay off with a higher proportion of accounts receivable
to the supplier in the RF contract. However, given lb ¼ lr , RF will not
create any advantages for the supplier. In this case, l does not have a
Pareto zone that benefits all participants under the RF mode.
Table 3 also shows how the payment ratio l influences the
 
Pareto zone lb ; lb . When l is lower than a certain level (e.g.,
l/0:7) or exceeds some threshold (e.g., l/1)), then lb does not
have a feasible Pareto zone for RF. Moreover, with an increasing
payment ratio l, both lb and lb increase, and model RF pre-
 
dominates over model AP. In sum, the Pareto zone lb ; lb gradu-
ally expands along with l when l is neither low nor high (e.g.,
0:8  l  0:9) yet gradually reduces when l exceeds a certain level
(e.g., l  0:95). Given the early payment plan of the retailer with
some term lr , the RF contract that is formulated through the two
correlated parameters of lb and l can benefit the firm and bank in a
sustainable supply chain.
We examine the efficiency and value of RF that is created for a
sustainable supply chain and discuss the impact of product cost on
the effort level of the supplier, the ordering decisions of the retailer,
and the profits of these players under the two payment modes. In
the numerical experiment, we denote the parameters as a ¼ 100;
b ¼ 9; p ¼ 100; w ¼ 40; l0 ¼ 60days; lr ¼ 45days, Ir ¼ 0:005, Is ¼
0:008, Ib ¼ 0:001 and l ¼ 0:9, lb ¼ 15days in the RF contract.
Tables 4 and 5 show the impact of product cost on the efficiency of
RF in promoting supply chain sustainability.
Table 4 shows that given a financing interest rate rRF and pay-
ment term lb (e.g., rRF ¼ 1  l ¼ 0:1, lb ¼ 15days), RF will gradually
motivate the supplier to increase its efforts in promoting the sus-
tainability of the supply chain in terms of either the production cost
cp or invested cost ce in sustainable development as well as increase
the order quantity of the retailer. In other words, provided a certain
cost ce that is invested in supply chain sustainability, if the mar-
ginal profit of the supplier's production (i.e., w  cp ) continues to
decrease, while the supplier increases its efforts in improving
supply chain sustainability. For a conventional or mature technical
product, the supplier willingly invests in promoting the sustain-
ability of the product line, while RF is more efficient than AP in
enhancing the sustainability of the operations between the sup-
plier and retailer. For an emerging industry where he can gain a
25 35 45
[0.8539,0.9351] [0.9121,0.9487] e
416 J. Zhan et al. / Journal of Cleaner Production 205 (2018) 407e418

Table 3   participant.
The impact of l on the Pareto zone lb ; lb where model RF outperforms model AP.

l 7. Conclusions and future extensions

0.7 0.8 0.85 0.90 0.95
e [0,14] [0,25] [4,34] [34,42]
Note: represents there exists a null Pareto zone that model RF outperforms model
AP.
high marginal profit from production, the supplier does not show
any motivation to promote a sustainable supply chain. In this case,
RF does not have any significant impact on stimulating the supplier
to engage in sustainable production. Moreover, compared with a
mature product line, the value of RF for the order strategy of the
retailer is not obvious.
Given a production cost cp , either the effort of the supplier or the
order quantity of the retailer in a sustainable supply chain increases
along with invested cost ce . If promoting supply chain sustainability
has a high invested cost, then the supplier becomes inclined to
adopt RF to settle its accounts because a high cost exacerbates the
capital turnover of the supplier, reduces the order quantity of the
retailer, and affects the profit of each party. However, RF solves such
dilemma because a higher invested cost corresponds to a stronger
effect of RF.
As shown in Table 5, each party gains a higher profit under
model RF than under model AP because under the former model,
the supplier is encouraged to promote supply chain sustainability,
which subsequently increases the order quantity of the retailer.
Although the supplier incurs a high cost in promoting supply chain
sustainability (e.g., ce /20), the increased order quantity and
accelerated capital turnover under the RF mode will bring high
investment returns to the supplier. Moreover, as the Stackelberg
leader in supply chain, the supplier receives more benefits from RF
than the retailer. Therefore, as the cost of either production cp or
the input of efforts into promoting sustainability ce increases, the
RF mode, rather than the AP mode of the retailer, will enhance the
sustainability of the supply chain and generate high payoff for each
1.00
e In this study, we investigate the value of two payment schemes,
namely, AP and RF, in promoting supply chain sustainability and
efficiency. First, our findings indicate that payment term affects the
efforts of suppliers in promoting supply chain sustainability and
efficiency. A longer lead time corresponds to an increased order
quantity of the retailer and a lower motivation for suppliers to
promote supply chain sustainability. However, the reduced efforts
of suppliers in promoting sustainability can reduce the order
quantity of the retailer. Models AP and RF can both encourage
suppliers to increase their efforts in promoting supply chain sus-
tainability and efficiency by reducing the payment lead time.
Second, by analyzing the equilibrium strategy between the
participants and comparing their profit under AP and RF, we find
that the RF scheme with a rational payment ratio and payment
term can effectively alleviate the conflict between the retailer and
supplier regarding the payment condition as well as promote the
sustainability efforts of the suppliers while simultaneously
increasing the order quantity of the retailers. Compared with the AP
scheme of the retailer, model RF can bring greater improvements in
supply chain sustainability and efficiency.
The results of the numerical analysis show that both the pro-
duction cost and charges in promoting supply chain sustainability
influence the efficiency of RF. With increased costs, the supplier
receives a lower marginal profit and becomes more willing to
engage in sustainable production. In this case, the financing effect
of the RF scheme is more significant than that of model AP.
Meanwhile, when the production cost or invested cost of supply
chain sustainability is lower than some threshold, the supplier has
limited motivation to promote supply chain sustainability, and
model RF does not effectively improve supply chain sustainability
and efficiency.
This study is not free from limitations. First, this work ignores
the capital constraints of the retailer and assumes that the
wholesale price is fixed. Future research may consider a highly

Table 4
The impact of cp and ce on the efficiency of RF for each player's equilibrium decision.
!
e*RF Q *RF
Operations ratio of each player *
; * .
eAP Q AP

cp ce

1 5 10 15 20

1 (1.017,1.001) (1.023,1.001) (1.028,1.001) (1.032,1.001) (1.036,1.001)

5 (1.019,1.001) (1.028,1.001) (1.034,1.001) (1.039,1.001) (1.043,1.002)
10 (1.025,1.001) (1.036,1.001) (1.045,1.001) (1.052,1.002) (1.059,1.002)
15 (1.034,1.001) (1.051,1.001) (1.065,1.002) (1.076,1.002) (1.088,1.003)
20 (1.053,1.001) (1.083,1.002) (1.109,1.003) (1.133,1.004) (1.158,1.005)

Table 5
The impact of cp and ce on the efficiency of RF for each player's profit.
* *
!
pRF
R pRF
S
Operations ratio of each player *; AP *
.
pAP
R p S

cp ce

1 5 10 15 20

1 (1.053,1.097) (1.053,1.098) (1.054,1.098) (1.054,1.103) (1.054,1.099)

5 (1.053,1.112) (1.053,1.113) (1.054,1.114) (1.053,1.114) (1.054,1.114)
10 (1.053,1.140) (1.054,1.141) (1.054,1.142) (1.054,1.142) (1.055,1.143)
15 (1.053,1.186) (1.054,1.187) (1.054,1.188) (1.055,1.189) (1.055,1.190)
20 (1.053,1.276) (1.054,1.279) (1.055,1.281) (1.057,1.283) (1.058,1.284)
 J. Zhan et al. / Journal of Cleaner Production 205 (2018) 407e418 417

#
complex situation under which the retailer faces cash shortage and ðlwcp ð1þIs l0 ÞÞIb þð1lÞIs vpRF
*

the wholesale price is varied. Second, although this study assumes Is l0 Þ , which implies that B
vlb
 0 if and only
½lwð1þIs ðl0 lb ÞÞcp ð1þIs l0 Þ2
full information, future research must take into consideration a
if lb  lb1 , combined with lb  lr , thus, if lb  minðlr ; lb1 ), then
potential information asymmetry. Third, this paper only considers a * *
vpRF vpRF
monopolistic supplier in a supply chain. Future studies may B
vlb
 0, else if lr  lb  lb1 , B
vlb
< 0.
examine multiple competitive suppliers who offer substitutable
products to the retailer and study the role of the AP and RF payment Proof of Lemma 1. (1) The condition of e*AP  0 implies that
schemes in promoting competitive supply chain sustainability and l  l1 , and l2 is the sole root of equation e*RF ¼ e*AP . From Corollary
efficiency. 3, e*AP increases with l, so if l  maxðl1 ; l2 Þ, then e*RF  e*AP > 0. (2)
Compare the retailer's order quantities under two modes, we
Acknowledgements derive an equilibrium root l3 of equality Q *RF ¼ Q *AP , due to Q *RF is
increasing with l, so if l  l3 , then Q *RF  Q *AP .
The authors appreciate two anonymous reviewers in improving * *

quality of this paper. This work is supported by the National Proof of Proposition 3. pRF AP ¼
R  pR
Z z*RF
Foundation of China [No.71872051, No.71472049, No. 71502084, ðp  wÞðz*RF  z*AP Þ  p FðxÞdx þ ðp  wÞðyðe*RF Þ  yðe*AP ÞÞ 
No. 71531005]; China Postdoctoral Science Foundation [No. z*AP
2015M571496]; the foundation of philosophy and social science Z yðe*AP Þ Z z*RF
research in colleges and universities in Jiangsu province [No. p FðxÞdx: Because ðp  wÞðz*RF  z*AP Þ  p FðxÞdx  ðp 
yðe*RF Þ z*AP
2018SJA0325]; the innovation team project of the humanities and
w pFðz*RF ÞÞðz*RF  z*AP Þ ¼ 0, and
social sciences of Fudan University. Z yðe*AP Þ
ðp  wÞðyðe*RF Þ  yðe*AP ÞÞ  p FðxÞdx  ½p  w  pFðyðe*RF ÞÞ
yðe*RF Þ
Appendix
½yðe*RF Þ  yðe*AP Þ When l  maxðl1 ; l2 Þ, e*RF  e*AP which implies

that yðe*RF Þ  yðe*AP Þ, due to Fð  yðe*AP ÞÞ ¼ 0, ðp  wÞðyðe*RF Þ  yðe*AP Þ

v2 pAP
Proof of Proposition 1. First, R
¼  pf ðQAP  yðeAP ÞÞ < 0, so
vQ 2AP Z yðe*AP Þ
pR is concave in QAP . The first order condition of pAP
AP
R indicates that
Þp FðxÞdx  0: Thus, pRF AP * *
  R  pR .
* 1 wð1þIr ðl0 lr ÞÞ yðe*RF Þ
retailer's optimal order quantity is Q AP ¼ yðeAP Þ þ F p .
*
Proof of Proposition 4. From Corollary 4, pRF S increases with l,
v2 pAP
Q *AP
*
Substitute into Eq. (2), and S
¼ ½wð1 þ Is ðl0  lr ÞÞ  cP ð1 þ so, given a lb , if le  l  1, then pRF  p AP * .
ve2AP S S
00 vpAP
Is l0 Þy ðeAP Þ < 0, so taking ¼ 0 derives that
S
veAP e*AP ¼ Proof of Proposition 5. Compared Eqs. (9) and (10), it is easy to
  derive the condition as shown in Proposition 5 under which the
ln b½wð1þIs ðlc0ð1þI
lr ÞÞcP ð1þIs l0 Þ
, and then Q *AP ¼ a bank is willing to provide RF service to supplier.
e s l0 Þ
 
ce ð1þIs l0 Þ 1 wð1þIr ðl0 lr ÞÞ Proof of Proposition 6. Combined Propositions 3, 4 and 5,
wð1þI ðl l ÞÞc ð1þI l Þ
þF p .
s 0 r P s 0
Proposition 6 is obvious.
Proof of Corollary 1. From Proposition 1, taking the derivation of Proof of Proposition 7. From the relationship between l and lb
e*AP and Q *AP with lr separately, it is easy to obtain Corollary 1. So the that is shown in Proposition 6, and combined Corollary 4, it is easy
proof process is omitted. to derive Proposition 7.
Proof of Corollary 2. From Eq. (3) and Eq. (4), it is easy to obtain
*
vpAP
that R
vlr
 0 if and only if x3  x4 . Meanwhile, from the supplier's References
*
profit as in Eq. (4), the derivation of pAP
S with lr indicates that
*
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