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Finance Sourcing in a Supply Chain

Decision Support Systems Journal, Forthcoming

18 Pages Posted: 5 Mar 2013 Last revised: 29 May 2013

Bing Jing

Cheung Kong Graduate School of Business

Abraham Seidmann

University of Rochester - Simon Business School

Date Written: February 1, 2013

Abstract

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.

Suggested Citation

Jing, Bing and Seidmann, Abraham, Finance Sourcing in a Supply Chain (February 1, 2013). Decision Support Systems Journal, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2228897 or http://dx.doi.org/10.2139/ssrn.2228897

Bing Jing (Contact Author)

Cheung Kong Graduate School of Business ( email )

Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China

Abraham Seidmann

University of Rochester - Simon Business School ( email )

Carol Simon Hall 3-333C
Rochester, NY 14627
United States
585-275-5694 (Phone)
585-275-9331 (Fax)

HOME PAGE: http://www.ssb.rochester.edu/fac/Seidmannav/

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