Optimizing buyer-backed purchase order financing in multi-level supply chains: integrating game theory and system dynamics

Working-capital shortages across multiple layers of the supply chain make financing, procurement, and inventory decisions interdependent. We develop a buyer-backed purchase-order financing structure in which a retailer backs bank loans to a capital-constrained supplier and a raw-material provider under uncertain demand and lending rates. System-dynamics stock updates for inventory carryover and working-capital reinvestment are integrated with a sequential financing game incorporating supplier best-response and outside-option participation regimes. The analysis distinguishes stochastic guarantee cash flows and mean-rate financing alternatives from a conditional operating benchmark in which production is optimized while accounting for borrowing costs and end-of-period inventory holding costs. Factorial simulation experiments using common random numbers examine interactions between loan rates and demand variability, loan rates and reinvestment, and demand variability and holding costs. Multi-period buyer-backed purchase-order financing with investment can enhance financial independence and reduce default risk and supporting sequential financing across multiple upstream tiers without necessarily increasing the buyer’s default exposure.