July  2020, 16(4): 1731-1752. doi: 10.3934/jimo.2019026

Supplier financing service decisions for a capital-constrained supply chain: Trade credit vs. combined credit financing

College of Management and Economics, Tianjin University, Tianjin, 300072, China

* Corresponding author: Ying Hu

Received  January 2018 Revised  December 2018 Published  July 2020 Early access  May 2019

In practice, suppliers and third-party logistics providers sometimes both offer credit in supply chain financing. To examine the supplier's financing decision, we firstly design a multiple-participant supply chain finance system comprising a supplier, a capital-constrained retailer, and a 3PL firm. Secondly, we compare combined credit financing (CCF), which includes both the supplier's partial trade credit and the 3PL firm's credit with trade credit financing (TCF), to analyze the supplier's optimal decision given the retailer's initial capital level and immediate payment coefficient. Thirdly, we consider the operational and financial parameters to obtain the optimal decisions of supply chain participants under both TCF and CCF. Finally, we perform a numerical analysis of the retailer's initial capital level and immediate payment coefficient. The results show that: when the retailer's initial capital level is low or the retailer's capital constraint is insignificant, the supplier will choose TCF; otherwise, the supplier would better choose CCF. It is more profitable for the supplier to cooperate with a retailer with limited assets under both TCF and CCF. Moreover, we obtained the threshold level of the retailer's initial capital to ensure the retailer's participation and the immediate payment coefficient that ensures the 3PL firm's participation under CCF.

Citation: Qiang Lin, Ying Peng, Ying Hu. Supplier financing service decisions for a capital-constrained supply chain: Trade credit vs. combined credit financing. Journal of Industrial and Management Optimization, 2020, 16 (4) : 1731-1752. doi: 10.3934/jimo.2019026
References:
[1]

A. Darip and J. Nilsen, Ensuring sales: A theory of inter-firm credit, American Economic Journal Microeconomics, 3 (2011), 245-279.  doi: 10.1257/mic.3.1.245.

[2]

C. Lee and B. Rhee, Trade credit for supply chain coordination, European Journal of Operational Research, 214 (2011), 136-146.  doi: 10.1016/j.ejor.2011.04.004.

[3]

C. LiK. Gurhan and J. Tong, The effect of payment schemes on inventory decisions: the role of mental accounting, Management Science, 59 (2013), 436-451. 

[4]

C. Jézabel and H. Jérôme, Trade credit terms offered by small firms: Survey evidence and empirical analysis, Journal of Business Finance and Accounting, 29 (2002), 0306–686X.

[5]

F. J. Stephen, A transactions theory of trade credit use, Quarterly Journal of Economics, 96 (1981), 243-270. 

[6]

G. Bi, Y. Fei, X. Yuan and D. Wang, Joint operational and financial collaboration in a capital-constrained supply chain under manufacturer collateral, Asia-Pacific Journal of Operational Research, 35 (2018), 1850010, 23pp. doi: 10.1142/S0217595918500100.

[7]

J. ZhanX. Chen and Q. Hu, The value of trade credit with rebate contract in a capital-constrained supply chain, International Journal of Production Research, 57 (2019), 379-396.  doi: 10.1080/00207543.2018.1442946.

[8]

J. Bing, R. Dewan and A. Seidmann, Finance sourcing in a supply chain, 2011 44th Hawaii International Conference on System Sciences, 2011. doi: 10.1109/HICSS.2011.206.

[9]

J. A. Buzacott and R. Q. Zhang, Inventory management with asset-based financing, Management Science, 50 (2004), 1274-1292.  doi: 10.1287/mnsc.1040.0278.

[10]

K. Panos and W. Zhao, Financing the newsvendor: Supplier vs. bank, and the structure of optimal trade credit contracts, Operations Research, 60 (2012), 566-580.  doi: 10.1287/opre.1120.1040.

[11]

M. Berlin, Trade credit: Why do production firms act as financial intermediaries?, Business Review, Q3 (2003), 21-28. 

[12]

M. Lama and M. Y. Jaber, A joint model for cash and inventory management for a retailer under delay in payments, Computers and Industrial Engineering, 66 (2013), 758-767. 

[13]

M. Petersen and R. Rajan, Trade credit: Theories and evidence, NBER Working Paper 5602, (1996), 1–42. doi: 10.3386/w5602.

[14]

M. ChernQ. PanJ. TengY Chan and S. Chen, Stackelberg solution in a vendor-buyer supply chain model with permissible delay in payments, International Journal of Production Economics, 144 (2013), 397-404.  doi: 10.1016/j.ijpe.2013.03.008.

[15]

M. Lariviere and E. Porteüs, Selling to the newsvendor: An analysis of price-only contracts, Manufacturing and Service Operations Management, 3 (2001), 273-400.  doi: 10.1287/msom.3.4.293.9971.

[16]

M. BrennanV. Maksimovics and J. Zechner, Vendor financing, Journal of Finance, 43 (1988), 1127-1141.  doi: 10.1111/j.1540-6261.1988.tb03960.x.

[17]

N. YanB. SunH. Zhang and C. Liu, A partial credit guarantee contract in a capital-constrained supply chain: Financing equilibrium and coordinating strategy, International Journal of Production Economics, 173 (2016), 122-133.  doi: 10.1016/j.ijpe.2015.12.005.

[18]

N. YanC. LiuY. Liu and B. Sun, Effects of risk aversion and decision preference on equilibriums in supply chain finance incorporating bank credit with credit guarantee, Applied Stochastic Models in Business and Industry, 33 (2017), 602-625.  doi: 10.1002/asmb.2264.

[19]

O. Boyabatli and T. Beril, Capacity investment in imperfect capital markets: The interaction of operational and financial decisions, Working paper, INSEAD, 2006.

[20]

S. BougheasS. Mateut and P. Mizen, Corporate trade credit and inventories: New evidence of a trade-off from accounts payable and receivable, Journal of Banking and Finance, 33 (2009), 300-307.  doi: 10.1016/j.jbankfin.2008.07.019.

[21]

T. GongX. Chao and D. Simchi-Levi, Dynamic inventory control with limited capital and short-term financing, Naval Research Logistics, 61 (2014), 184-201.  doi: 10.1002/nav.21576.

[22]

W. Jin and J.W Luo, Optimal Credit Contract Design for a Capital-constrained Supply Chain Incorporating into Risk Aversion, Chinese Journal of Management Science, (2018).

[23]

X. Chen and G. Cai, Joint logistics and financial services by a 3PL firm, European Journal of Operational Research, 214 (2011), 579-587.  doi: 10.1016/j.ejor.2011.05.010.

[24]

X. Chen, A model of trade credit in a capital-constrained distribution channel, International Journal of Production Economics, 159 (2015), 347-357. 

[25]

X. Chen and A. Wang, Trade credit contract with limited liability in the supply chain with budget constraints, Annals of Operations Research, 196 (2012), 153-165.  doi: 10.1007/s10479-012-1119-0.

[26]

Y. Miwa and J. Ramseyer, Trade credit, bank loans, and monitoring: Evidence from Japan, Ssrn Electronic Journal, 2005, 49pp. doi: 10.2139/ssrn.843526.

[27]

Y. ZhouZ. Wen and X. Wu, A single-period inventory and payment model with partial trade credit, Computers and Industrial Engineering, 90 (2015), 132-145.  doi: 10.1016/j.cie.2015.08.003.

show all references

References:
[1]

A. Darip and J. Nilsen, Ensuring sales: A theory of inter-firm credit, American Economic Journal Microeconomics, 3 (2011), 245-279.  doi: 10.1257/mic.3.1.245.

[2]

C. Lee and B. Rhee, Trade credit for supply chain coordination, European Journal of Operational Research, 214 (2011), 136-146.  doi: 10.1016/j.ejor.2011.04.004.

[3]

C. LiK. Gurhan and J. Tong, The effect of payment schemes on inventory decisions: the role of mental accounting, Management Science, 59 (2013), 436-451. 

[4]

C. Jézabel and H. Jérôme, Trade credit terms offered by small firms: Survey evidence and empirical analysis, Journal of Business Finance and Accounting, 29 (2002), 0306–686X.

[5]

F. J. Stephen, A transactions theory of trade credit use, Quarterly Journal of Economics, 96 (1981), 243-270. 

[6]

G. Bi, Y. Fei, X. Yuan and D. Wang, Joint operational and financial collaboration in a capital-constrained supply chain under manufacturer collateral, Asia-Pacific Journal of Operational Research, 35 (2018), 1850010, 23pp. doi: 10.1142/S0217595918500100.

[7]

J. ZhanX. Chen and Q. Hu, The value of trade credit with rebate contract in a capital-constrained supply chain, International Journal of Production Research, 57 (2019), 379-396.  doi: 10.1080/00207543.2018.1442946.

[8]

J. Bing, R. Dewan and A. Seidmann, Finance sourcing in a supply chain, 2011 44th Hawaii International Conference on System Sciences, 2011. doi: 10.1109/HICSS.2011.206.

[9]

J. A. Buzacott and R. Q. Zhang, Inventory management with asset-based financing, Management Science, 50 (2004), 1274-1292.  doi: 10.1287/mnsc.1040.0278.

[10]

K. Panos and W. Zhao, Financing the newsvendor: Supplier vs. bank, and the structure of optimal trade credit contracts, Operations Research, 60 (2012), 566-580.  doi: 10.1287/opre.1120.1040.

[11]

M. Berlin, Trade credit: Why do production firms act as financial intermediaries?, Business Review, Q3 (2003), 21-28. 

[12]

M. Lama and M. Y. Jaber, A joint model for cash and inventory management for a retailer under delay in payments, Computers and Industrial Engineering, 66 (2013), 758-767. 

[13]

M. Petersen and R. Rajan, Trade credit: Theories and evidence, NBER Working Paper 5602, (1996), 1–42. doi: 10.3386/w5602.

[14]

M. ChernQ. PanJ. TengY Chan and S. Chen, Stackelberg solution in a vendor-buyer supply chain model with permissible delay in payments, International Journal of Production Economics, 144 (2013), 397-404.  doi: 10.1016/j.ijpe.2013.03.008.

[15]

M. Lariviere and E. Porteüs, Selling to the newsvendor: An analysis of price-only contracts, Manufacturing and Service Operations Management, 3 (2001), 273-400.  doi: 10.1287/msom.3.4.293.9971.

[16]

M. BrennanV. Maksimovics and J. Zechner, Vendor financing, Journal of Finance, 43 (1988), 1127-1141.  doi: 10.1111/j.1540-6261.1988.tb03960.x.

[17]

N. YanB. SunH. Zhang and C. Liu, A partial credit guarantee contract in a capital-constrained supply chain: Financing equilibrium and coordinating strategy, International Journal of Production Economics, 173 (2016), 122-133.  doi: 10.1016/j.ijpe.2015.12.005.

[18]

N. YanC. LiuY. Liu and B. Sun, Effects of risk aversion and decision preference on equilibriums in supply chain finance incorporating bank credit with credit guarantee, Applied Stochastic Models in Business and Industry, 33 (2017), 602-625.  doi: 10.1002/asmb.2264.

[19]

O. Boyabatli and T. Beril, Capacity investment in imperfect capital markets: The interaction of operational and financial decisions, Working paper, INSEAD, 2006.

[20]

S. BougheasS. Mateut and P. Mizen, Corporate trade credit and inventories: New evidence of a trade-off from accounts payable and receivable, Journal of Banking and Finance, 33 (2009), 300-307.  doi: 10.1016/j.jbankfin.2008.07.019.

[21]

T. GongX. Chao and D. Simchi-Levi, Dynamic inventory control with limited capital and short-term financing, Naval Research Logistics, 61 (2014), 184-201.  doi: 10.1002/nav.21576.

[22]

W. Jin and J.W Luo, Optimal Credit Contract Design for a Capital-constrained Supply Chain Incorporating into Risk Aversion, Chinese Journal of Management Science, (2018).

[23]

X. Chen and G. Cai, Joint logistics and financial services by a 3PL firm, European Journal of Operational Research, 214 (2011), 579-587.  doi: 10.1016/j.ejor.2011.05.010.

[24]

X. Chen, A model of trade credit in a capital-constrained distribution channel, International Journal of Production Economics, 159 (2015), 347-357. 

[25]

X. Chen and A. Wang, Trade credit contract with limited liability in the supply chain with budget constraints, Annals of Operations Research, 196 (2012), 153-165.  doi: 10.1007/s10479-012-1119-0.

[26]

Y. Miwa and J. Ramseyer, Trade credit, bank loans, and monitoring: Evidence from Japan, Ssrn Electronic Journal, 2005, 49pp. doi: 10.2139/ssrn.843526.

[27]

Y. ZhouZ. Wen and X. Wu, A single-period inventory and payment model with partial trade credit, Computers and Industrial Engineering, 90 (2015), 132-145.  doi: 10.1016/j.cie.2015.08.003.

Figure 1.  The operation of the trade credit financing mechanism
Figure 2.  The CCF in a multiple-participant SCF system
Figure 3.  Effects of retailer's initial capital on supplier's expected profit
Figure 4.  Effects of retailer's initial capital on the retailer and 3PL firm's expected profits
Figure 5.  The operation of the trade credit financing mechanism
Figure 6.  The operation of the trade credit financing mechanism
Figure 7.  The operation of the trade credit financing mechanism
Figure 8.  The operation of the trade credit financing mechanism
Table 1.  List of notations
Parameters Description
$ p $ Retail price
$ c $ Manufacturing cost
$ x $ Random demand, $ x \ge 0 $
$ B $ Retailer's initial capital level
$ \lambda $ The immediate payment coefficient
$ {r_f} $ The risk-free interest rate
$ {r_t} $ The interest rate offered by the supplier
$ P\left( {{a_1}} \right) $ The success rate of financing
$ w $ The supplier's wholesale price
$ q $ The retailer's order quantity
$ r $ The 3PL firm's financing interest rate
Parameters Description
$ p $ Retail price
$ c $ Manufacturing cost
$ x $ Random demand, $ x \ge 0 $
$ B $ Retailer's initial capital level
$ \lambda $ The immediate payment coefficient
$ {r_f} $ The risk-free interest rate
$ {r_t} $ The interest rate offered by the supplier
$ P\left( {{a_1}} \right) $ The success rate of financing
$ w $ The supplier's wholesale price
$ q $ The retailer's order quantity
$ r $ The 3PL firm's financing interest rate
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