Purchase Order Financing: Credit, Commitment, and Supply Chain Consequences

47 Pages Posted: 12 Jun 2015

See all articles by Matthew Reindorp

Matthew Reindorp

Drexel University - Department of Decision Sciences

Fehmi Tanrisever

Bilkent University, Faculty of Business Administration

Anne Lange

Darmstadt University of Technology

Date Written: April 4, 2015

Abstract

We study a supply chain where a retailer buys from a supplier who cannot fully finance her production. Informational problems about the supplier’s demand prospects and production capabilities restrict her access to capital. By committing to a minimum purchase quantity, the retailer can mitigate these informational problems and expand the supplier’s feasible production set. We assume a newsvendor model of operations and analyze the strategic interaction of the two parties as a sequential game. Key parameters in our model are the supplier’s ex-ante credit limit; her informational transparency (which conditions the amount of additional capital released by the commitment); and the demand characteristics of the final market. We show that in equilibrium the supplier can benefit from a lower ex-ante credit limit or lower informational transparency. The retailer always benefits from an increase in these parameters. Moreover, the supplier’s ex-ante credit limit and informational transparency may be substitutes or complements with respect to her own profit, but are always substitutes with respect to the retailer’s profit. Our study provides a novel perspective on capital market frictions in supply chain contracting.

Keywords: Supply Chain Finance, Newsvendor, Order Commitment

JEL Classification: G10, G30

Suggested Citation

Reindorp, Matthew and Tanrisever, Fehmi and Lange, Anne, Purchase Order Financing: Credit, Commitment, and Supply Chain Consequences (April 4, 2015). Available at SSRN: https://ssrn.com/abstract=2616812 or http://dx.doi.org/10.2139/ssrn.2616812

Matthew Reindorp

Drexel University - Department of Decision Sciences ( email )

United States

Fehmi Tanrisever (Contact Author)

Bilkent University, Faculty of Business Administration ( email )

Bilkent
Ankara, 06800
Turkey

Anne Lange

Darmstadt University of Technology ( email )

Universitaets- und Landesbibliothek Darmstadt
Magdalenenstrasse 8
Darmstadt, Hesse D-64289
Germany

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