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

• Author: Bin Shen,Yifan Cao,Xin Wang,Qingying Li
• Date: 01 September 2020
• Published date: 01 September 2020
• DOI: http://doi.org/10.1111/itor.12670

Intl. Trans. in Op. Res. 27 (2020) 2422–2448

DOI: 10.1111/itor.12670

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Financing decisions in supply chains with a capital-constrained

manufacturer: competition and risk

Bin Shen, Xin Wang, Yifan Cao and Qingying Li,∗

Glorious Sun School of Business and Management, Donghua University, Shanghai 200051, China

E-mail: binshen@dhu.edu.cn [Shen]; arielwang96@163.com [Wang]; paula.caoyf@gmail.com[Cao];

liqingying@dhu.edu.cn [Li]

Received 14 December 2018; receivedin revised form 4 March 2019; accepted 28 March 2019

Abstract

Supply chain finance is a crucial topic. In this paper, we consider that a capital-constrained manufacturercan

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 retailcompetition and supply chain member’s risk aversion on supplychains, 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 retaileris 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 appropriatetrade 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 theimpacts of supply chain members’ risk aversion are

limited in supply chain financing scheme selection. More managerial insights are discussed.

Keywords:supply chain finance; competition; risk aversion; capital-constrained manufacturer

1. Introduction

Lacking of capital is an eternal dilemma in supply chains.To avoid cash flow shortage, supply chain

members borrow credits from an external bank or an internal creditor (e.g., the manufacturer or

buyer self). The former one is known as bank credit financing and the latter one is known as trade

credit financing (Zhao and Huchzermeier, 2015). For example, in China, many small and medium

∗Corresponding author.

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B. Shen et al. / Intl. Trans.in Op. Res. 27 (2020) 2422–2448 2423

enterprises are capital-constrained but servefor the giant buyers such as Macy’s and JC Penney. Due

to the fact that the supply contracts are reliable, the capital-constrained manufacturer can receive

loan credits from either a bank through the bank creditfinancing or a buyer through the trade credit

financing (Zhao and Huchzermeier, 2015). In this paper, we first examine a base model in which

retail competition is excluded. We study the case under which a capital-constrained manufacturer

trades with a retailer and seeks for the bank credit financing or trade credit financing.

Manufacturers work for multiple buyers in the present supply network. One Chinese apparel

manufacturer, for example, may produce for both Nike and Adidas, or both H&M and Zara at the

same time. They producesubstitutable products which eventually compete in retailing. In this study,

we consider the financing decisions with retail competition. In particular, there are three types of

financing schemes (1) the manufacturer borrowsfrom the bank only (only bank credit financing), (2)

the manufacturer borrows from the two retailers (dual trade credit financing), and (3) the manufac-

turer borrows from both the bank and one retailer (bank and trade credit mix financing). A natural

question arises: will the manufacturer behave differently in the presence of retail competition?

Since the financial crisis in 2008, the degree of risk aversion of supply chain agents has increased

more significantly than ever (Shen et al., 2013). For example, U.S. giant retailers such as JC Penney

have met financial stress recently and have to be more conservative in ordering (La Monica, 2018).

The Chinese textile and apparel manufacturers areall struggling with USD currency instability and

trade war, and have to be more risk averse in production and contract design (Townsend, 2018).

Thus, in order to cope with the risk aversion behavioramong supply chain members, it is important

to incorporate the risk aversion of supply chain members into the analytical models and critically

analyze the appropriate supply chain financing strategies (Shen and Li, 2017; He et al., 2018).

Therefore, we further extend the model and consider that both the retailer and manufacturer are

risk averse. We build up a stylish supply chain model with only bank credit financing, dual trade

credit financing, and bank and trade credit mix financing, respectively, when the manufacturer is

capital constrained.

To the best of our knowledge, it is the first analytical study associated with various financing

schemes on the capital-constrained manufacturer in supply chains considering retail competition

and risk. Specifically, we are interested in the following research questions:

(1) What is the manufacturer’s optimal borrowing strategy with and without retail competition?

(2) How would various financing schemes influence the retailers’ and manufacturer’s performance

in supply chains?

(3) How do the degrees of risk aversion affect financing schemes with the capital-constrained

manufacturer?

The major contribution of our study is threefold. First, without retail competition, the retailer

is always willing to use the trade credit financing, whereas with retail competition, if one retailer

provides the credit but the other does not, the credit provider could receive the superior perfor-

mance. Thus, providing the appropriate trade credit financing scheme is of vital importance to the

enhancement of retailer’sprofit. Second, without retail competition, if the trade credit interest rate is

relatively low, both the retailer and manufacturer benefit from using the trade credit financing. This

result implies that the trade credit financing could induce a win-win situation for both the retailer

and manufacturer when the interest rate of trade credit is low. However, with retail competition,

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2019 The Authors.

International Transactionsin Operational Research C

2019 International Federation of OperationalResearch Societies