Effect of Supply Chain Finance Solutions on Production Planning Under Yield and Lead Time Uncertainty

Key findings from this study

This research indicates that:

• Payment terms extending beyond 90 days can eliminate expected supplier profit across all evaluated financing methods.
• Optimal profit demonstrates substantially higher sensitivity to combined interest rate and yield probability effects than procurement quantity adjustments do.
• Buyer Backed Purchase Order Finance advantages suppliers with higher yields, while Advance Payment Discount advantages suppliers with lower yields when interest rate flexibility is available.

Overview

The research examines optimal input procurement decisions for capital-constrained make-to-order manufacturers operating under yield and lead time uncertainty. The study compares four supply chain finance methods: Advance Payment Discount (APD), Bank Loan (BL), Reverse Factoring with initial bank loan (RF), and Buyer Backed Purchase Order Finance (BPOF). The analytical framework applies to manufacturing and service processes including mechanical, electronics, and cold chain transportation operations.

Methods and approach

The authors formulated the optimal input procurement problem as a stochastic optimization model incorporating binomial production yield and discrete random lead time. Expected profit maximization determined optimal solutions across all financing schemes. Convexity proofs were established for APD, BL, and RF objective functions. For BPOF, the objective function was reformulated as a difference of convex functions and solved via Difference of Convex Functions programming.

Results

Payment terms exceeding 90 days eliminate supplier profitability expectations and lead to order abandonment across all financing methods. Optimal profit exhibits greater sensitivity to joint variations in interest rates and yield probability than procurement quantities exhibit. Fluctuations in lead time also substantially influence optimal profit levels.

For suppliers with higher yield rates, BPOF delivers maximum advantage when interest rates remain uniform across financing options. For suppliers with lower yield rates, APD provides the greatest advantage when interest rate flexibility is exploited. The interaction between yield probability, interest rate structures, and lead time uncertainty critically determines which financing method optimizes supplier returns.

Implications

The findings indicate that supply chain finance method selection cannot be divorced from operational characteristics, particularly yield performance and lead time variability. Capital-constrained manufacturers require integrated approaches that jointly optimize production input timing and financing decisions rather than treating these dimensions sequentially. Standard payment terms may require renegotiation to preserve supplier profitability in high-uncertainty environments.

For practitioners, yield rate emerges as the primary determinant of financing method efficacy, not merely cost considerations. Organizations should conduct scenario analysis across multiple lead time and yield distributions before committing to particular financing arrangements. The analytical framework enables quantitative assessment of method suitability under firm-specific operational conditions.

Scope and limitations

This summary is based on the study abstract and available metadata. It does not include a full analysis of the complete paper, supplementary materials, or underlying datasets unless explicitly stated. Findings should be interpreted in the context of the original publication.