Penalty and financial assistance in a supply chain with supply disruption

In a supply chain, when the supply is hit by an unexpected disruption, the supplier may face certain financial difficulty to resume normal production, causing a supply shortage as well as a loss to the manufacturer and the entire supply chain. Combining a penalty term in writing contracts with the provision of financial assistance is the carrot and stick approach used by a manufacturer to deal with supply disruption. This article investigates how the manufacturer, in a better financial situation, may use ex-ante penalty terms and ex-post financial assistance to compel the supplier to recover its production capability as much as possible. We find that, the MS (integration of financial assistance and the nondelivery penalty) is the best strategy for the manufacturer in most situations, but it is not a win-win strategy. An interesting result contrary to the conventional wisdom, is that the optimal delivery quantity for the supply chain under the centralized decision-making is less than that under the decentralized decision-making. (C) 2016 Elsevier Ltd. All rights reserved.