Financing the capital-constrained supply chain with loss aversion: Supplier finance vs. supplier investment

By Nina Yan, Xiuli He, Ye Liu. Omega, 2019

131 citations recorded by the source corpus.

Abstract This study examines two supply chain financing schemes for the capital-constrained retailer: supplier finance (SF) and supplier investment (SI). SF allows a downstream capital-constrained retailer to pay partially with all the initial working capital, and delays the outstanding balance with a deferred interest rate until the end of the selling season. Under SI, the supplier invests in the capital-constrained retailer’s operations as equity and then obtains a portion of dividends in return. Considering the retailer’s aversion to loss, we comparatively analyze the retailer’s ordering decision and the supplier’s pricing decision under these two schemes. We then investigate the value of each scheme and the participation motivations for both parties. We find that loss aversion influences the participants’ decisions. When the retailer is loss-averse, she will make more conservative order decisions, and the supplier will set a higher wholesale price. The loss-averse retailer will order more under the SI than under the SF. Also, the lower the retailer’s initial working capital, the higher the benefit from pure SF or SI for both supply chain members. In particular, if the retailer is highly capital-constrained, both participants prefer SI to SF. Finally, we explore the financing portfolio of pure SF and SI. Our results show that the supplier can achieve the highest profit when offering the financing portfolio and the retailer may accept this menu.

Subfields: Accounting, Management Information Systems, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/65bea33bc2949adbb060d0c07f6732715d666ca3