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doi: 10.3934/jimo.2020057

Selecting the supply chain financing mode under price-sensitive demand: confirmed warehouse financing vs. trade credit

Qiang Lin , Yang Xiao , and  Jingju Zheng

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

* Corresponding author: Yang Xiao

Received  May 2018 Revised  June 2019 Published  March 2020

Fund Project: The authors acknowledge support from National Key R&D Program of China, no.2018YFB1500801 and National Social Science Fund of China [18BGL269].

In a product market with price-sensitive demand, we examine a supply chain consisting of one manufacturer and one capital-constrained retailer. The retailer may purchase by borrowing by securing confirmed warehouse financing (CWF) from a competitive bank or the manufacturer's trade credit financing (TCF), provided that it is also to the latter's benefit to extend TCF. We obtain the manufacturer's optimal pricing decision in the two financing modes under the wholesale price contract that coordinates the supply chain given a wider range of wholesale prices in CWF. We find that CWF is more suitable for the customer segment for which the unit retail price is low and demand is stable, so the product can be monetized quickly; TCF is suitable for the customer segment for which the unit retail price is high and has a high price elasticity of demand and hence for long-term investment. The repurchase price is an important factor affecting the participants' selection of CWF.

Keywords: Price-sensitive demand, Demand elasticity of price, Trade credit, Confirmed warehouse financing, Wholesale price contract.
Mathematics Subject Classification: Primary: 91A05, 43K30; Secondary: 37H99.
Citation: Qiang Lin, Yang Xiao, Jingju Zheng. Selecting the supply chain financing mode under price-sensitive demand: confirmed warehouse financing vs. trade credit. Journal of Industrial & Management Optimization, doi: 10.3934/jimo.2020057
References:
[1]

B. Biais and C. Gollier, Trade credit and credit rationing, Review of Financial Studies, 10 (1997), 903-937.  doi: 10.1093/rfs/10.4.903.  Google Scholar

[2]

M. Berlin, Trade credit: Why do production firms act as financial intermediaries?, Business Review, 3 (2003), 21-28.   Google Scholar

[3]

G. Cai, X. Chen and Z. Xiao, The roles of bank and trade credits: Theoretical analysis and empirical evidence, Production and Operations Management, 23 (2014), 583-598.  doi: 10.1111/poms.12035.  Google Scholar

[4]

G. P. Cachon and M. A. Lariviere, Supply chain coordination with revenue-sharing contracts: Strengths and limitations, Management Science, 51 (2005), 30-44.  doi: 10.1287/mnsc.1040.0215.  Google Scholar

[5]

S.-C. Chen, L. E. Cárdenas-Barrón and J.-T. Teng, Retailer's economic order quantity when the supplier offers conditionally permissible delay in payments link to order quantity, International Journal of Production Economics, 155 (2014), 284-291.  doi: 10.1016/j.ijpe.2013.05.032.  Google Scholar

[6]

X. Chen, A model of trade credit in a capital-constrained distribution channel, International Journal of Production Economics, 159 (2015), 347-357.  doi: 10.1016/j.ijpe.2014.05.001.  Google Scholar

[7]

J. Du, Y. Lu and Z. Tao, Bank loans vs. trade credit: Evidence from China, Economics of Transition and Institutional Change, 20 (2012), 457-480.  doi: 10.1111/j.1468-0351.2012.00439.x.  Google Scholar

[8]

Y. Duan, J. Huo, Y. Zhang and J. Zhang, Two level supply chain coordination with delay in payments for fixed lifetime products, Computers and Industrial Engineering, 63 (2012), 456-463.  doi: 10.1016/j.cie.2012.04.007.  Google Scholar

[9]

D. Fabbri and A. M. C. Menichini, Trade credit, collateral liquidation, and borrowing constraints, Journal of Financial Economics, 96 (2010), 413-432.  doi: 10.1016/j.jfineco.2010.02.010.  Google Scholar

[10]

S. S. Guo, A Study on the Decision Making of Supply Chain Finance Based on the Confirmation, Master thesis, Tsinghua University, Beijing, 2011. Google Scholar

[11]

D. Gupta and L. Wang, A stochastic inventory model with trade credit, Manufacturing and Service Operations Management, 11 (2009), 4-18.  doi: 10.1287/msom.1070.0191.  Google Scholar

[12]

M. Giannetti, M. Burkart and T. Ellingsen, What you sell is what you lend? Explaining trade credit contracts, Review of Financial Studies, 24 (2011), 1261-1298.  doi: 10.1093/rfs/hhn096.  Google Scholar

[13]

M. D. Hill, G. W. Kelly and G. B. Lockhart, Shareholder returns from supplying trade credit, Financial Management, 41 (2012), 255-280.  doi: 10.1111/j.1755-053X.2012.01198.x.  Google Scholar

[14]

E. Hofmann, Supply chain finance: Some conceptual insights, Logistik Management, (2005), 203–214. Google Scholar

[15]

P. Kouvelis 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.  Google Scholar

[16]

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

[17]

Q. Lin, X. Su and Y. Peng, Supply chain coordination in confirming warehouse financing, Computers and Industrial Engineering, 118 (2018), 104-111.  doi: 10.1016/j.cie.2018.02.02.  Google Scholar

[18]

G. Marotta, Is trade credit more expensive than bank loans? Evidence from Italian firm-level data, SSRN, published online, (2001), 35 pp. doi: 10.2139/ssrn.260064.  Google Scholar

[19]

Y. Miwa and J. M. Ramseyer, Trade credit, bank loans, and monitoring: Evidence from Japan, Harvard Law and Economics Discussion Paper, (2005), 49 pp. doi: 10.2139/ssrn.843526.  Google Scholar

[20]

N. C. Petruzzi and M. Dada, Pricing and the News Vendor problem: A review with extensions, Operations Research, 47 (1999), 183-194.  doi: 10.1287/opre.47.2.183.  Google Scholar

[21]

C. Raddatz, Credit chains and sectoral comovement: Does the use of trade credit amplify sectoral shocks?, Review of Economics and Statistics, 92 (2010), 985-1003.   Google Scholar

[22]

R. A. Schwartz, An economic model of trade credit, Journal of Financial and Quantitative Analysis, 9 (1974), 643-657.  doi: 10.2307/2329765.  Google Scholar

[23]

J. K. Smith, Trade credit and informational asymmetry, The Journal of Finance, 42 (1987), 863-872.  doi: 10.1111/j.1540-6261.1987.tb03916.x.  Google Scholar

[24]

A. Q. Tan, Research on the Financing of Small and Medium Sized Enterprises' Confirmation Warehouse Based On Supply Chain Finance, Master thesis, Dalian University of Technology, 2013. Google Scholar

[25]

C. X. Wang, A general framework of supply chain contract models, Supply Chain Management, 7 (2013), 302-310.   Google Scholar

[26]

X. D. Xu and J. R. Birge, Joint production and financing decisions: Modeling and analysis, SSRN, (2005), 29 pp. doi: 10.2139/ssrn.652562.  Google Scholar

show all references

References:
[1]

B. Biais and C. Gollier, Trade credit and credit rationing, Review of Financial Studies, 10 (1997), 903-937.  doi: 10.1093/rfs/10.4.903.  Google Scholar

[2]

M. Berlin, Trade credit: Why do production firms act as financial intermediaries?, Business Review, 3 (2003), 21-28.   Google Scholar

[3]

G. Cai, X. Chen and Z. Xiao, The roles of bank and trade credits: Theoretical analysis and empirical evidence, Production and Operations Management, 23 (2014), 583-598.  doi: 10.1111/poms.12035.  Google Scholar

[4]

G. P. Cachon and M. A. Lariviere, Supply chain coordination with revenue-sharing contracts: Strengths and limitations, Management Science, 51 (2005), 30-44.  doi: 10.1287/mnsc.1040.0215.  Google Scholar

[5]

S.-C. Chen, L. E. Cárdenas-Barrón and J.-T. Teng, Retailer's economic order quantity when the supplier offers conditionally permissible delay in payments link to order quantity, International Journal of Production Economics, 155 (2014), 284-291.  doi: 10.1016/j.ijpe.2013.05.032.  Google Scholar

[6]

X. Chen, A model of trade credit in a capital-constrained distribution channel, International Journal of Production Economics, 159 (2015), 347-357.  doi: 10.1016/j.ijpe.2014.05.001.  Google Scholar

[7]

J. Du, Y. Lu and Z. Tao, Bank loans vs. trade credit: Evidence from China, Economics of Transition and Institutional Change, 20 (2012), 457-480.  doi: 10.1111/j.1468-0351.2012.00439.x.  Google Scholar

[8]

Y. Duan, J. Huo, Y. Zhang and J. Zhang, Two level supply chain coordination with delay in payments for fixed lifetime products, Computers and Industrial Engineering, 63 (2012), 456-463.  doi: 10.1016/j.cie.2012.04.007.  Google Scholar

[9]

D. Fabbri and A. M. C. Menichini, Trade credit, collateral liquidation, and borrowing constraints, Journal of Financial Economics, 96 (2010), 413-432.  doi: 10.1016/j.jfineco.2010.02.010.  Google Scholar

[10]

S. S. Guo, A Study on the Decision Making of Supply Chain Finance Based on the Confirmation, Master thesis, Tsinghua University, Beijing, 2011. Google Scholar

[11]

D. Gupta and L. Wang, A stochastic inventory model with trade credit, Manufacturing and Service Operations Management, 11 (2009), 4-18.  doi: 10.1287/msom.1070.0191.  Google Scholar

[12]

M. Giannetti, M. Burkart and T. Ellingsen, What you sell is what you lend? Explaining trade credit contracts, Review of Financial Studies, 24 (2011), 1261-1298.  doi: 10.1093/rfs/hhn096.  Google Scholar

[13]

M. D. Hill, G. W. Kelly and G. B. Lockhart, Shareholder returns from supplying trade credit, Financial Management, 41 (2012), 255-280.  doi: 10.1111/j.1755-053X.2012.01198.x.  Google Scholar

[14]

E. Hofmann, Supply chain finance: Some conceptual insights, Logistik Management, (2005), 203–214. Google Scholar

[15]

P. Kouvelis 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.  Google Scholar

[16]

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

[17]

Q. Lin, X. Su and Y. Peng, Supply chain coordination in confirming warehouse financing, Computers and Industrial Engineering, 118 (2018), 104-111.  doi: 10.1016/j.cie.2018.02.02.  Google Scholar

[18]

G. Marotta, Is trade credit more expensive than bank loans? Evidence from Italian firm-level data, SSRN, published online, (2001), 35 pp. doi: 10.2139/ssrn.260064.  Google Scholar

[19]

Y. Miwa and J. M. Ramseyer, Trade credit, bank loans, and monitoring: Evidence from Japan, Harvard Law and Economics Discussion Paper, (2005), 49 pp. doi: 10.2139/ssrn.843526.  Google Scholar

[20]

N. C. Petruzzi and M. Dada, Pricing and the News Vendor problem: A review with extensions, Operations Research, 47 (1999), 183-194.  doi: 10.1287/opre.47.2.183.  Google Scholar

[21]

C. Raddatz, Credit chains and sectoral comovement: Does the use of trade credit amplify sectoral shocks?, Review of Economics and Statistics, 92 (2010), 985-1003.   Google Scholar

[22]

R. A. Schwartz, An economic model of trade credit, Journal of Financial and Quantitative Analysis, 9 (1974), 643-657.  doi: 10.2307/2329765.  Google Scholar

[23]

J. K. Smith, Trade credit and informational asymmetry, The Journal of Finance, 42 (1987), 863-872.  doi: 10.1111/j.1540-6261.1987.tb03916.x.  Google Scholar

[24]

A. Q. Tan, Research on the Financing of Small and Medium Sized Enterprises' Confirmation Warehouse Based On Supply Chain Finance, Master thesis, Dalian University of Technology, 2013. Google Scholar

[25]

C. X. Wang, A general framework of supply chain contract models, Supply Chain Management, 7 (2013), 302-310.   Google Scholar

[26]

X. D. Xu and J. R. Birge, Joint production and financing decisions: Modeling and analysis, SSRN, (2005), 29 pp. doi: 10.2139/ssrn.652562.  Google Scholar

Figure 1.  CITIC Bank's CWF business process
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Figure 2.  Sequence of events
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Figure 3.  The Pareto region under CWF
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Figure 4.  The Pareto region under TCF
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Figure 5.  The manufacturer's profit under CWF and TCF with different retail prices
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Figure 6.  The manufacturer's profit under CWF and TCF with different price elasticities of demand
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Figure 7.  The supply chain members' profits under CWF with different repurchase prices
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