Inventory financing a risk-averse newsvendor with strategic default

Abstract

PurposeThe paper aims to explore the optimal strategies of inventory financing when the risk-averse retailer has different objectives, in the presence of multi-risk, i.e. demand risk, non-operational risk and retailer's strategic default risk.Design/methodology/approachThis paper develops an inventory financing model consisting of a bank and a risk-averse retailer with strategic default. This paper considers two scenarios, i.e. the capital-constrained retailer cares about its profit or firm value. In the first scenario, the bank acts as a Stackelberg leader determining its interest rate, and the retailer acts as a follower determining its pledged quantity. In the second one, the bank capital market is perfectly competitive. Lagrange multiplier method is adopted to solve the optimization.FindingsThe optimal strategies in inventory financing scheme in two scenarios are derived. Only when the initial stock is relatively high, the retailer pledges part of the initial stock. Retailer's risk aversion reduces its pledged quantity and performance. The strategic default reduces its profit. When it is relatively high, the bank refuses to offer the loan.Practical implicationsAnalytical inventory and financing strategies are specified to help retailers and banks to better understand the interaction of finance and operations management and to better respond to multi-risk.Originality/valueNew results and managerial insights are derived by incorporating partially endogenous strategic default and risk aversion into inventory financing, which enriches the interfaces of operations management and finance.

Credit financing and channel encroachment: analysis of distribution choice in a dual-channel supply chain

“…Depending on which kind of credit financing is considered, two strategies are described. When financing is sourced from a bank, it is known as bank credit financing (BCF strategy) which mainly focuses on the perspective of coordination contracts (Ding and Wan 2020 ; Shi et al 2020 ), inventory decisions (Chakuu et al 2020 ; Li et al 2020a , b ; He et al 2020 ), information sharing (Li et al 2019 ; Sang 2021 ), etc. For the BCF strategy, Zhou et al ( 2020 ) explored the equilibrium of guarantor financing for retailers who can borrow bank credit in a four-stage supply chain structure.…”

“…Yan et al ( 2018 ) explored the influences of product durability on the strategies of channel encroachment under the oligopoly market structure, and found that both members benefited from channel encroachment if the product durability is at a threshold level. On this basis, Li et al ( 2020a , b ) illustrated the interactions between channel encroachment and retail inventory under the scenarios of centralization and decentralization. In addition, for multiple downstream firms, Guan et al ( 2019 ) analyzed the relationship between channel encroachment and retail inventory to find that each member could obtain more profit for retail competition.…”

“…Similar to Singh and Vives ( 1984 ) and Li et al ( 2020a , b ), we assume the utility-based function of representative consumers is , and derive each channel’s demand function. More specifically, we assume that the market share can be divided into an online part and offline part, where .…”

“…Based on the assumption that the demand mainly depends on price, we construct the linear-price demand functions to analyze this problem (Deo and Corbett 2009;Shen et al 2018;Zhen et al 2020). Similar to Singh and Vives (1984) and Li et al (2020a, b), we assume the utilitybased function of representative consumers is U q s , q r , d r = s q s + q r + r d r − 1 2 q 2 s − 2 2 q 2 r − 3 2 d 2 r − q s q r + q s d r + q r d r , and derive each channel's demand function. More specifically, we assume that the market share can be divided into an online part and offline part, where s + r = 1 .…”

Application of text mining in identifying the factors of supply chain financing risk management

“…As a traditional resource of monitoring, fixed assets in SME business loans can be provided by either a firm or a firm's owner, in forms such as real estate, motor vehicles and equipment (Niinimaki, 2016). As an additional resource for monitoring, inventory and accounts receivable are studied by more researches as working capital collateral (Chen et al, 2017;Li et al, 2020). To monitor collaterals effectively and guarantee their liquidation value ,the practice should rely heavily on contractual regulations that formulate the delivery of goods, information flow and the negotiable instruments of financial flows (Hofmann and Belin, 2011).…”