Financing the retailers with default probabilities: capital constrained supplier vs. bank

Abstract

In this paper, we examine a supply chain consisting of a supplier with capital constraint and multiple retailers with no working capital. The retailers can get either trade credit from the supplier or loan from banks. All the retailers are differentiated by their credit scores, which measure the possibility that they default. We show that when the retailer's default probability is high compared with the marginal cost, the retailer cannot get financial support. If the retailers only get money from banks, the more reliable a retailer is, the higher the wholesale price the supplier may charge him. We also find out that the supplier has the motivation to provide trade credit even when the retailers can get money from banks. And no matter where the retailers get money from, when the initial capital is a little insufficient, the supplier will reduce the quantity of the products provided to all retailers. As the initial capital becomes less, the supplier will cut off all the supply to the lowest-score retailer first no matter whether the supplier undertakes the default risk or not. In other words, when the retailers are heterogeneous, for supplier, it is not always the more retailers, the better.

Keywords:

• Supply chain management
• capital constraint
• trade credit
• default probability
• multiple retailers

Acknowledgements

This work was supported in part by the Ministry of Science and Technology of China under Grant 2020AAA0108402 and the National Natural Science Foundation of China (NSFC) under Grant 71825007, in part by the National Natural Science Foundation of China (NSFC) under Grant 72210107001.

Data availability statement

The data that support the findings of this study are available from the corresponding author, DD Wu, upon reasonable request.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Notes on contributors

Jing Qin

Jing Qin is a Ph.D. candidate in Financial Statistics at Economics and Management School, University of Chinese Academy of Sciences, China. His research interests include supply chain finance and financial engineering.

Desheng Dash Wu

Desheng Dash Wu is a Professor at Economics and Management School, University of Chinese Academy of Sciences, China. He has published more than 200 ISI indexed articles in refereed journals, such as POM, JMIS, DSJ, Risk Analysis, and the IEEE TKDE. He is editor of two book series on Risk Management (Springer).  His current research interests include mathematical modelling of systems containing uncertain and risky situations, with special interests in the finance– economics–operations interface, maximising operational and financial goals using the methodologies for game theory, and large-scale optimisation. Prof. Wu serves as an Editor/Board Member of more than ten peer-reviewed journals. He is a fellow of the Academia Europaea and the European Academy of Sciences and Arts.

Kun Qin

Kun Qin is currently a student at School of International Trade and Economics, Central University of Finance and Economics China. Her research interests include risk management, international economics and trade, and supply chain finance.

Yaoxiang Nie

Yaoxiang Nie is a Ph.D. candidate in Operations Management at Simon Business School, University of Rochester, U.S. He received his bachelor's degree in Finance from Henan University in 2016 and an M.S. degree in Financial Engineering from the University of Southern California in 2018. His research interests include optimal control of the queueing system, supply chain finance, and financial engineering.