Blockchain-Enabled Deep-Tier Supply Chain Finance

Abstract

Problem definition: For many supply chains, deep-tier suppliers, due to their small size and lack of access to capital, are most vulnerable to disruptions. We study the use of advance payment (AP) as a financing instrument in a multitier supply chain to mitigate the supply disruption risk in a traditional system (with limited visibility) and a blockchain-enabled system (with perfect visibility). The main goal of this paper is to shed light on how blockchain adoption impacts agents’ operational and financial decisions as well as profit levels in a multitier supply chain. Academic/practical relevance: Traditionally, because of the limited visibility in the deep tiers, powerful downstream manufacturers’ financing schemes offered to their immediate upstream suppliers are not effective in instilling capital into the deep tiers. Advancements in blockchain technology improve the supply chain visibility and enable the manufacturer to better devise deep-tier financing to improve supply chain resilience. Methodology: We develop a three-tier supply chain model and take a game-theoretic approach to compare how blockchain-enabled deep-tier financing schemes affect a financially constrained supply chain’s optimal risk-mitigation and financial strategies. Results: We find that although improved visibility via blockchain adoption can help the manufacturer make informed supply chain financing decisions, whether it can benefit all supply chain members depends on the financing schemes in use. Blockchain-enabled delegate financing increases risk-mitigation investments and benefits all three tiers of the supply chain only when the tier 2 supplier is severely capital-constrained with the working capital below a threshold. Because delegate financing endows the intermediary tier 1 supplier with leverage over the manufacturer, the inefficiency inhibits an all-win outcome when the tier 2 supplier is not severely capital-constrained. Blockchain-enabled cross-tier direct financing exhibits a compelling performance as it always leads to win-win-win outcomes (and is thus ubiquitously implementable) regardless of the suppliers’ working capital profile. Managerial implications: Our insights help firms assess opportunities and challenges associated with enhancing supply chain visibility via blockchain adoption.