Network adopts incentive contracts to reveal an unreliable supplier’s

Networkrobustness and decentralized system are two important issues for theintegrating supply chain manager to manage when engaging in virtualmanufacture. In the social aspect, suppliers’ trust and fear affect networkperformance (Škulj, et al. 2014).

In supply chainmanagement, risk management in a decentralized system is crucial. In the realworld, the integrating supply chain manager—the distributor—manages his suppliers’ difficulties toenhance his social preferences and therefore the business model based onnetworks—virtual manufacture—is potentially robust. Conversely, virtualmanufacture for the distributor who is as a network orchestration is sustained through mitigation ofthe supplier’s supply risks and resolving the difficulty in supplier’sproduction (Li & Fung, 2017).To complete a new product order froma brand owner in a supply chain, a distributor is often faced with the dilemmaof sourcing quantities from an entrant supplier. An entrant SME supplier, withlower cost in production, is privileged with respect to its cost and productioninformation regardless of whether it is a sourcing member in a distributor’s”sourcing pocket.” In addition, a SME supplier inherently lacks funds whenreceiving an order from the distributor.

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From a distributor’s perspective, whenreceiving an order from a brand owner, he necessarily helps the SME supplierborrow funds and considers supply risk, a term that refers to thecharacteristics of an unreliable supplier; additionally, the distributorapplies a second reliable supplier as dual sourcing strategy for mitigating thesupply risk of the unreliable supplier. Thus, the distributor builds a credit guarantee mechanism with dualsourcing strategy that the distributor adopts incentive contracts to reveal anunreliable supplier’s attribute to manage the distributor’s supply risk.Li and Fung (www.lifung.com) is a well-known company that provides consumer goods design,development, sourcing and distribution services. The company built its globalnetwork to create an efficient and effective supply chain that provideshigh-volume, time-sensitive goods to brand owners worldwide. Past, Li &Fung buys the raw materials processed in the supplier’s factory, meanwhilesupervisors sent by Li & Fung monitor the production in supplier’s factorysuch that Li & Fung is able to run business in “smokeless factory”(Magretta, 1998). Quoting 2016 annual report from Li & Fung (Li & Fung,2016): “In 2016, we continued to shift the strategic focus of our compliancework from offering auditbased services to remediation and capacity-buildingservices.

” The transition on the strategy in Li & Fung is more aggressiveand agile such that Li & Fung considers the supplier’s deficiency and tryto solve it. To resolve cash-constrained SME supplier’s difficulty, Li andFung, being as guarantor, is more familiar with supervising suppliers who borrowfunds from a financial institution; therefore, the financial institution andmembers of the supply chain—such as suppliers and brand owners—benefit from thecustomer value provided by Li and Fung. From Li and Fung’s perspective, whenthe company helps its suppliers borrow money to fulfill the order that it hasoutsourced, the characteristics of those suppliers—which likely are small andmedium enterprises (SME)—must be assumed by Li and Fung.

The SME sector plays an importantrole in economic growth, especially in Asian countries. SMEs also create aconsiderable number of employment opportunities and generate a certain impacton a country’s economic development. TheEconomist has noted that India’s many SMEs are a key driver of economicgrowth and national advancement (The Economist, 2010). Thus, SMEs have aconsiderable macroeconomic impact in most Asian and developing countries isconsiderable. In microeconomics, the role of SMEs in these countries is oftenas a supplier dominated by his buyer—a distributor—in a supply chain: the SMEis a follower; on the other hand, SMEs as a price taker attracts buyersoutsource the order in lower cost. Although cost-effective SMEs are attractiveand sought by a distributor who is as a leader or orchestrator in a supplychain, a distributor may resolve SMEs’ difficulty and investigate its SMEsupplier’s characteristics to mitigate a distributor’s supply risk.Despite these positivecontributions, SMEs often suffer financial difficulties. An SME does not need alarge amount of capital to establish itself, but it may not have sufficientworking capital when it begins to process orders.

Shortage of funding in a firmnot only decreases the buyer’s order quantity but also slows the firm’sdevelopment (Rantanen, 2011). Therefore, finding a way to support SME financingis an enterprise operation, a supply chain operation and a national economic development issue.As a high-risk and low-profitborrower, SMEs rarely obtain loans from financial institutions unless they havea considerable amount of credit (Ahmed and Chowdhury, 2009; Srinivasa Raghavanand Mishra, 2011). The natural characteristics of SMEs almost involve acquiringa substantial amount of credit to obtain loan funds. To overcome this obstacle,an SME may find methods for funding.

In this study, with a funding shortage orcapacity constraint supplier, a credit guarantee mechanism is established in which a distributor with a greatdeal of credit guarantees an unreliable but cost-effective supplier that moneywill be found.From the distributor’s (buyer’s)perspective, supply risk is an issue of concern in supply chain risk. Among the suppliers,characteristics such as disruption rate, fulfillment rate, and cost varybecause of the suppliers’ core competence in their industries. The supplier’sproduction process may suffer from defect such that the unit production costvaries (Yang et al., 2009) and the output may not satisfy the buyer’s orderbefore deadline. To obtain benefit from an unreliable but cost-effective supplier,a distributor is suggested to mitigate the risk of delivery quantities from thesupplier such that the distributor reveals the attribute of a supplier.Disclosing the supplier’s attribute not only benefits distributor in operationlevel but also aligns with corporation’s strategic level.

For example, WilliamFung (Li & Fung, 2017), Group Chairman in Li & Fung, has announced thatvast connection of suppliers enable Li & Fung to resolve the brand owner’sorders and to provide better customer values under Li & Fung’s newThree-Year Plan (2017-2019). In our research, we focus on discussing suppliers’tactical plans for order allocation related to the variety of supplierdisruption and cost uncertainty in managing both operational and disruptionrisk. The distributor representing Li and Fung engages in various executions ofhis strategy based on the variety of his suppliers’ characteristics.