How financing strategies affect business models and market strategies in a circular economy

Abstract

With growing concern about environmental protection in recent years, many countries and institutions have advocated circular economy business models, such as leasing, remanufacturing and servitization. However, there are challenges companies face when transforming into a circular economy business model. Capital constraint is one of the challenges, especially for small to medium companies. Supply chain finance seeks to integrate physical, financial, and information flows along the supply chain. Among supply chain finance practices, buyer direct finance and platform finance play vital roles in helping many capital-constrained businesses smooth operations along the supply chain. Unlike under bank finance, the lender is a third-party financial institution, such as a commercial bank; under buyer direct finance, the buyer has two roles in the supply chain, i.e., buyer and lender. The buyer can directly offer financial support to its supplier. Similarly, the intermediary platform can directly lend money to its small suppliers under platform finance.

This research aims to explore how supply chain finance influences the business model and business strategy decisions in a circular economy business model. The assumption of this research is based on the belief that supply chain finance can improve supply chain members’ performance due to the lender’s dual roles. Specifically, this thesis examines, comparing with bank finance, how supply chain finance (namely buyer direct finance and platform finance) affects the operation decisions and market strategies in the circular economy business models, i.e., the servitization business model and remanufacturing business model. In the first part of this thesis, the author examines how the user direct finance (buyer direct finance) affects the servitized user’s (the buyer side) moral hazard of using the servitized product with carelessness in a servitization business model. Then, the model is extended to study if the user direct finance can reduce the moral hazard from the servitizing provider (supplier side); in other words, can the user direct finance increase the servitizing provider’s effort of maintaining the servitized product? In the second part of the thesis, the author studies how platform finance impacts the market strategies of supply chain members in a remanufacturing business model. This research examines this research question by considering that the platform can play two different roles in a closed-loop supply chain, i.e., serving as an online marketplace and acting as a downstream buyer. Furthermore, the author provides insights into the choice between these two roles for the platform.

The method chosen for this thesis is mathematical modelling. Stackelberg games are developed to examine the research questions. The models are solved by backward inductions, and the optimal operation decisions and market strategies are determined under supply chain finance and bank finance, respectively. Then, the two financing options are compared to investigate the impact of supply chain finance. Moreover, the performance of supply chain finance and bank finance are compared to the benchmark case where there is no capital constraint, respectively. The author finds that supply chain finance can achieve better performance than the benchmark case, while bank finance cannot. This thesis enhances the understanding of supply chain finance, offers practical insights into supply chain finance application, and determines the optimal financing strategy that maximizes the efficiency of the supply chain.

Date of Award	3 Sept 2024
Original language	English
Awarding Institution	Northumbria University
Supervisor	Marc Reimann (Supervisor), Weihua Zhang (Supervisor) & Gendao Li (Supervisor)