Selection of financing strategies with a risk-averse supplier in a capital-constrained supply chain

Supply chain finance is a crucial topic. In this paper, we consider that a capital-constrained manufacturer can borrow money from either a bank (bank credit financing) or a retailer (trade credit financing). Our analysis compares supply chain performance under these two financing schemes. Furthermore, we extend our model to evaluate the impacts of retail competition and supply chain member's risk aversion on supply chains, which consist of one capital-constrained manufacturer and two competing retailers. We consider three financing schemes: only bank credit financing, dual trade credit financing, and bank and trade credit mix financing. We find that without retail competition, the retailer is always willing to use the trade credit financing; whereas with retail competition, if one retailer provides the trade credit but the other does not, the credit provider could receive the superior profit. Thus, providing an appropriate trade credit financing scheme is critically important for retailers. Moreover, we find that without retail competition, when a trade interest rate is relatively low, both the retailer and manufacturer could reach a win-win situation in the trade credit financing. However, with retail competition, supply chain members (i.e., two retailers and one manufacturer) will not have an all-win situation no matter which specific financing scheme is adopted and only a win-win-lose situation exists when using the credit mix financing scheme or the dual trade credit financing in supply chains. Last but not least, regardless of risk neutrality or aversion of supply chain members, their pricing decisions among three financing schemes are similar. This implies that the impacts of supply chain members' risk aversion are limited in supply chain financing scheme selection. More managerial insights are discussed. Fig. 1. The manufacturer's optimal decisions among three financing schemes in terms of various retailers' interest rates (we set α 0 = 10, δ = 0.5, c = 0.1, σ = 5, r f = 0.01, r b = 0.05, F 1 = 5, F 2 = 5, and C = 8). Proposition 5.(then π BC * M > π TC * M > π BT * M ; (ii) Q 1 > r b > N 1 , then π BC * M > π BT * M > π TC * M ; (iii) min{Q 1 , L 1 } > r b , then π TC * M > π BC * M > π BT * M ; (iv) N 1 > r b > Q 1 , then π TC * M > π BT * M > π BC * M ; (v) r b > max{Q 1 , L 1 }, then π BT * M > π BC * M > π TC * M ; (vi) L 1 > r b > N 1 , then π BT * M > π TC * M > π BC * M .

Section: Literature Reviewmentioning

confidence: 99%

Financing decisions in supply chains with a capital‐constrained manufacturer: competition and risk

Shen

Wang

Cao

et al. 2019

“…Li et al. () examine the supply chain with a capital‐constrained retailer and a risk‐averse supplier. Huang et al.…”

Section: Literature Reviewmentioning

confidence: 99%

Influences of supply chain finance on the mass customization program: risk attitudes and cash flow shortage

Guo

Liu

2019

In recent years, to satisfy diversified customer needs in the target market, an increasing number of brands have launched mass customization (MC) programs as one of their core operations strategies. The production process flexibility and personalization degree of customized products (i.e., the MC products) have thus become key to the success of MC schemes. In the meantime, however, considering the high market uncertainty in consumer preferences and the challenges from the production process, there are plenty of risks in MC operations. Hence, in this paper we develop a game-theoretic model consisting of an MC brand and an upstream manufacturer to identify the influences of supply chain finance (SCF) on MC programs. The influences brought by the risk attitudes of both MC brand and manufacturer are analyzed. Besides, an extra interest rate for raising the working capital for production (e.g., from the bank) at the manufacturing level is also considered in this paper to address the impact of cash flow shortage. We find that when the positive sensitivity of the market demand with respect to the modularity level of the MC product is sufficiently high, the optimal product modularity level of the MC product increases with the MC brand's degree of risk averse. In addition, it can also be observed that when both the market demand's positive sensitivity to the modularity level of the MC product and the MC brand's opportunity cost rate for placing the advance order are sufficiently high, any increase in the risk-averse degree of the MC brand or the manufacturer will lower the manufacturer's optimal wholesale price of the MC product as well as the MC brand's optimal rate of the advance order. Furthermore, the higher the interest that the manufacturer needs to pay (such as to the bank) for raising the working capital for the MC production process, the lower the optimal wholesale price of each finished MC product will be to help the manufacturer raise more money through the advance order placed by the MC brand. These observations complete the findings in the extant literature and provide important managerial insights into managing MC operations.

“…Li et al. () present a similar model to compare the partial guarantee and trade credit, but restrict their attention on the uniform demand distribution. More recently, Jin et al.…”

Section: Literature Reviewmentioning

confidence: 99%

“…() and Li et al. () study the equilibrium decisions of the supply chain parties under a similar financing scheme called partial credit guarantee. Jin et al.…”

Section: Limited Proportion Guaranteementioning

confidence: 99%

“…Evergrowing Bank offered the retailer a loan conditional on the promise of the manufacturer to repay part of the loan to the bank if the retailer's bankruptcy occurred. Similarly, some other Chinese commercial banks, such as Hua Xia Bank and ICBC (Industrial and Commercial Bank of China), also provide loans to support SMEs based on the partial credit guarantee of the core enterprises in supply chains (Li et al., ; Jin et al., ).…”

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

The supplier's optimal guarantee policy in newsvendor finance

Jiang

2019

The retailer is a capital-constrained newsvendor and can borrow money from the bank if necessary. To help the retailer get a bank loan at a lower interest rate, the supplier provides guarantee for the retailer's loan up to a prespecified amount. In a Stackelberg game, the supplier decides the wholesale price and the guarantee amount as a leader, and then the retailer determines the order quantity and the amount of the loan as a follower. The supplier is risk-neutral while the retailer's risk preference is reflected by a spectral risk measure (risk-neutral, risk-averse, or risk-seeking). For a given wholesale price and guarantee amount, the retailer's objective function is quasi-concave in the order quantity. The optimal solutions for the supplier and the retailer are derived. The supplier's expected profit with optimized wholesale price increases with the guarantee amount, and thus the supplier's optimal policy is to provide a full guarantee for the retailer's loan. When the supplier can limit his guarantee responsibility by a proportion of the outstanding loan obligation, the supplier's optimal policy is also to provide a full guarantee. Even if the retailer incurs bankruptcy costs in the event of repayment default, the supplier's optimal guarantee policy remains the same in these two different forms of limited guarantee. However, when the wholesale price is exogenous, that is, not a decision variable, the full guarantee is not necessarily optimal for supplier.