Trade credit for supply chain coordination

Chang Hwan Lee and Byong-Duk Rhee

European Journal of Operational Research, 2011, vol. 214, issue 1, 136-146

Abstract: Trade-credit is a seller's short-term loan to the buyer, allowing the buyer to delay payment of an invoice. It has been the largest source of working capital for a majority of business-to-business firms in the United States. Numerous theories have been proposed to explain trade-credit, mainly from finance perspectives. It has also been an important issue in supply chain management. Surprisingly, most literature in supply chain management has examined the retailer's stocking policies given a supplier's trade-credit. This paper attempts to shed light on trade-credit from a supplier's perspective, and presents it as a tool for supply chain coordination. Specifically, we explicitly assume firms' financial needs for inventory. Following a Newsvendor framework, we assume that the supplier grants trade-credit and markdown allowance. Given the supplier's offer, the retailer determines order quantity and the financing option for the inventory, either trade-credit or direct financing from a financial institution. Our result shows that the supplier's markdown allowance alone cannot fully coordinate the supply chain if the retailer employs direct financing. Positive financing costs call for trade-credit in order to subsidize the retailer's costs of inventory financing. Using trade-credit in addition to markdown allowance, the supplier fully coordinates the retailer's decisions for the largest joint profit, and extracts a greater portion of the maximized joint profit.

Keywords: Finance; Trade-credit; Inventory; financing; Supply; chain; coordination; Newsvendor; framework (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (84)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:214:y:2011:i:1:p:136-146

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