Production Chain Disruptions: Inventory, Preparedness, and Insurance

Dong, Lingxiu; Tang, Sammi; Tomlin, Brian

doi:10.1111/poms.12866

Cited by 56 publications

(29 citation statements)

References 38 publications

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“…Finally, our paper fits in the operations-finance interface literature, which examines firms' operational decisions in the presence of financial constraints. Representative papers in this literature include Babich and Sobel (2004), Buzacott and Zhang (2004), Xu and Birge (2004), Dada and Hu (2008), Lai et al (2009), Aydin et al (2011), Boyabatlı and Toktay (2011), Li et al (2013), and Dong et al (2015). Particularly related to our paper, several studies have analyzed optimal inventory policies in a dynamic setting with the provision of trade credit (Gupta and Wang 2009, Federgruen and Wang 2010, Huh et al 2011, Luo and Shang 2013.…”

Section: Related Literaturementioning

confidence: 83%

Trade Credit in Competition: A Horizontal Benefit

Peura

Yang

Lai

2017

M&SOM

144

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Trade credit is a widely adopted industry practice. Prior research has focused on how trade credit benefits firms by improving vertical supply chain relationships. This paper offers a novel perspective by examining whether trade credit can benefit suppliers through a horizontal channel. Under the classic Bertrand competition framework, we analyze two competing firms’ price decisions with and without trade credit. We find that when the firms are financially constrained, trade credit softens horizontal price competition. Specifi- cally, with trade credit, the firms will behave less aggressively in setting their prices for fear of incurring additional financing costs, resulting in equilibrium prices above the marginal cost, even if the products are perfect substitutes. Equilibrium profits under trade credit may thus be strictly higher than those under cash contracts. Furthermore, we find that with trade credit, a financially stronger firm may be able to exclude its weaker competitor from the market. We also investigate the relationship between the firms’ financial strength and their physical capacity in the competition with trade credit. We find that the horizontal benefit of trade credit over cash contracts increases as either the firms’ physical capacities increase or their financial status weakens. Therefore, with trade credit, firms’ financial constraints are a partial substitute for the role that physical capacity plays in price competition. Finally, we study the firms’ choice between offering trade credit and cash contracts. We find that trade credit is the equilibrium contract form if customers value trade credit, suggesting that the horizontal benefit of trade credit may complement its vertical roles

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Section: Related Literaturementioning

confidence: 83%

Trade Credit in Competition: A Horizontal Benefit

Peura

Yang

Lai

2017

M&SOM

144

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“…The rapidly growing literature on the operations-finance interface examines the interplay between firms' operational decisions and financial frictions. Papers such as Babich and Sobel (2004), Buzacott and Zhang (2004), Xu and Birge (2004), Gaur and Seshadri (2005), Caldentey and Haugh (2006), and Ding et al (2007), Boyabatlı and Toktay (2011), Alan and Gaur (2011), Dong and Tomlin (2012), Li et al (2013), andDong et al (2015) focus on joint operational and financial decision-making in individual companies. Several more closely related papers in this stream have examined how financial constraints influence supply chain performance: Dada and Hu (2008) study a cash-constrained retailer's optimal ordering quantity when facing a profit-maximizing bank ;Lai et al (2009) discuss whether a cash-constrained supplier should operate in pre-order or consignment mode; Caldentey and Chen (2010) propose a contract where the supplier offers partial credit to the budget-constrained retailer; Kouvelis and Zhao (2011) study the optimal price-only contract when selling to a cash-constrained newsvendor when bankruptcy is costly.…”

Section: Related Literaturementioning

confidence: 99%

Trade Credit, Risk Sharing, and Inventory Financing Portfolios

2018

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As an integrated part of a supply contract, trade credit has intrinsic connections with supply chain coordination and inventory management. Using a model that explicitly captures the interaction of firms' operations decisions, financial constraints, and multiple financing channels (bank loans and trade credit), this paper attempts to better understand the risk-sharing role of trade credit -that is, how trade credit enhances supply chain efficiency by allowing the retailer to partially share the demand risk with the supplier. Within this role, in equilibrium, trade credit is an indispensable external source for inventory financing, even when the supplier is at a disadvantageous position in managing default relative to a bank. Specifically, the equilibrium trade credit contract is net terms when the retailer's financial status is relatively strong. Accordingly, trade credit is the only external source that the retailer uses to finance inventory. By contrast, if the retailer's cash level is low, the supplier offers two-part terms, inducing the retailer to finance inventory with a portfolio of trade credit and bank loans. Further, a deeper early-payment discount is offered when the supplier is relatively less efficient in recovering defaulted trade credit, or the retailer has stronger market power. Trade credit allows the supplier to take advantage of the retailer's financial weakness, yet it may also benefit both parties when the retailer's cash is reasonably high. Finally, using a sample of firm-level data on retailers, we empirically observe the inventory financing pattern that is consistent with what our model predicts.

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“…Babich (2010) characterizes manufacturers' joint subsidy and capacity reservation policies when facing financially distressed suppliers. Dong and Tomlin (2012) and Dong et al (2015) examine how insurance can interact with operational strategies in mitigating supply risk when the chain is subject to financing costs. Our paper complements the supply risk literature by focusing on the interaction between suppliers' financial constraints and endogenous effort and delivery performance, highlighting that selecting financing schemes properly plays a crucial role in manufacturers' sourcing decisions and profitability.…”

Section: Related Literaturementioning

confidence: 99%

Sourcing from Suppliers with Financial Constraints and Performance Risk

Tang

Yang

2018

M&SOM

270

120

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Two innovative financing schemes have emerged in recent years to enable suppliers to obtain financing for production. The first, purchase order financing (POF), allows financial institutions to offer loans to suppliers by considering the value of purchase orders issued by reputable buyers. Under the second, which we call buyer direct financing (BDF), manufacturers issue both sourcing contracts and loans directly to suppliers. Both schemes are closely related to the supplier's performance risk (whether the supplier can deliver the order successfully), which the repayment of these loans hinges upon. To understand the relative efficiency of the two emerging schemes, we analyze a game-theoretical model that captures the interactions between three parties (a manufacturer, a financially constrained supplier who can exert unobservable effort to improve delivery reliability, and a bank). We find that when the manufacturer and the bank have symmetric information, POF and BDF yield the same payoffs for all parties irrespective of the manufacturer's control advantage under BDF. The manufacturer, however, has more flexibility under BDF in selecting contract terms. In addition, even when the manufacturer has superior information about the supplier's operational capability, the manufacturer can efficiently signal her private information via the sourcing contract if the supplier's asset level is not too low. As such, POF remains an attractive financing option. However, if the supplier is severely financially constrained, the manufacturer's information advantage makes BDF the preferred financing scheme when contracting with an efficient supplier. In particular, the relative benefit of BDF (over POF) is more pronounced when the supply market contains a larger proportion of inefficient suppliers, when differences in efficiency between suppliers are greater, or when the manufacturer's alternative sourcing option is more expensive.

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Production Chain Disruptions: Inventory, Preparedness, and Insurance

Cited by 56 publications

References 38 publications

Trade Credit in Competition: A Horizontal Benefit

Trade Credit in Competition: A Horizontal Benefit

Trade Credit, Risk Sharing, and Inventory Financing Portfolios

Sourcing from Suppliers with Financial Constraints and Performance Risk

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