Sourcing with Deferred Payment and Inspection under Supplier Product Adulteration Risk

Rui, Huaxia; Lai, Guoming

doi:10.1111/poms.12313

Cited by 112 publications

(49 citation statements)

References 19 publications

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“…Several recent works in the operations-finance interface literature examine the role of trade credit in operational settings. Babich and Tang (2012) and Rui and Lai (2015) show how trade credit can be used to mitigate a supplier's moral hazard. Cai et al (2014) and Chod (2015) identify that, by tying financing with physical transactions, trade credit controls the buyer's opportunistic behavior.…”

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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Section: Related Literaturementioning

confidence: 99%

Trade Credit, Risk Sharing, and Inventory Financing Portfolios

2018

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“…the credit extended by suppliers to buyers. First, Babich and Tang (2012) and Rui and Lai (2015) establish the role of trade credit in deterring suppliers' moral hazard.…”

Section: Related Literaturementioning

confidence: 99%

Sourcing from Suppliers with Financial Constraints and Performance Risk

Tang

Yang

2018

M&SOM

271

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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“…For example, Chen et al [6] explore the influence of trade credit and limited liability on optimal strategies, and they demonstrate that trade credit not only creates new value for firms but also achieves partly coordination of the supply chain. Rui et al and Wang et al [26,27] believe that trade credit can incite capital-constrained retailer to increase ordering quantity and make a partial payment for products. Lee et al [28] propose that trade credit is more used by suppliers with smaller market share and it can as a competitive tool for suppliers with weak market power.…”

Section: Integrated Management Of Operation and Financementioning

confidence: 99%

Research on Operation and Financing Strategy of an Emission-Dependent Supply Chain under Variable Transportation Fee Strategy

Zhang

Yao

2019

Sustainability

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Under the carbon cap-and-trade mechanism, we consider an emission-dependent supply chain consisting of a supplier, a manufacturer, and a 3PL firm that adopts variable transportation fee strategy. Five models on the basis of the supplier and manufacturer with or without capital constraints are considered to discuss members’ optimal decisions. The insights are obtained as follows. First, the ordering quantity under 3PL financing service is larger than that under two firms are well-funded when the transportation fee or carbon emission is less than a certain constant. The variable transportation fee strategy and members’ carbon emission reduction behavior are beneficial to each supply chain participant. Second, the carbon emissions of members decide whose capital constraint is more beneficial to 3PL firm, and 3PL prefers to cooperate with a medium rich manufacturer (rich supplier). Third, the external financing modes are analyzed to get the 3PL financing service can create new value for the manufacturer and 3PL if the transportation fee is below a threshold, and this threshold increases with the manufacturer’s carbon emission. When the transportation fee is larger than a threshold, a capital-constrained supplier will choose bank financing, and this threshold decreases with the supplier’s carbon emission. Finally, we demonstrate that the manufacturer’s loss aversion (carbon cap) can increase (decrease) its bankruptcy threshold.

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Sourcing with Deferred Payment and Inspection under Supplier Product Adulteration Risk

Cited by 112 publications

References 19 publications

Trade Credit, Risk Sharing, and Inventory Financing Portfolios

Trade Credit, Risk Sharing, and Inventory Financing Portfolios

Sourcing from Suppliers with Financial Constraints and Performance Risk

Research on Operation and Financing Strategy of an Emission-Dependent Supply Chain under Variable Transportation Fee Strategy

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