Finance Sourcing in a Supply Chain
Cheung Kong Graduate School of Business
University of Rochester - Simon Business School
February 1, 2013
Decision Support Systems Journal, Forthcoming
We examine the relative merits of bank versus trade credit in a supply chain consisting of a manufacturer and a capital-constrained retailer. We show that trade credit is more effective than bank credit in mitigating double marginalization when production costs are relatively low, and that bank credit becomes more effective otherwise. The reason is as follows. Under bank financing, with limited liability the retailer carries the same inventory as if it faces no capital constraint. Under trade financing, the manufacturer shares the risk of low demand with the retailer, prompting the latter to stock a higher inventory than under bank financing. This higher inventory level mitigates (aggravates) double marginalization when the production costs are relatively low (high). This article thus provides a new explanation for trade credit, and also guides the manufacturer’s decision as to when to offer trade credit.
Number of Pages in PDF File: 18
Date posted: March 5, 2013 ; Last revised: May 29, 2013