Retailer Initiated Inventory-Based Financing

35 Pages Posted: 30 Nov 2021 Last revised: 16 Feb 2022

See all articles by Hongyu Chen

Hongyu Chen

Massachusetts Institute of Technology (MIT); Peking University - School of Mathematical Sciences

Weiming Zhu

HKU Business School, The University of Hong Kong

Date Written: February 1, 2022

Abstract

We study an innovative financing scheme in which a large retailer provides inventory-based financing (IBF) to a small retailer selling through her own brick-and-mortar channel. In anticipation of a peak selling period, the small retailer could repeatedly pledge her on-hand inventory in exchange for a loan amount, which is in turn used to procure more inventory, i.e., stockpiling to fulfill a stochastic customer demand. Following sales proceeds, the small retailer buys back the pledged inventory to the extent possible, and defaults on any leftovers which will be liquidated by the big retailer via his own platform. We analyze the contract design and the effectiveness of such financing scheme through a game-theoretical model. In particular, we derive the optimal joint inventory ordering and pledging decisions for the small retailer during the stockpiling phase; we further characterize the optimal loan interest rate for the big retailer. Using datasets obtained from the financial technology arm of a leading online retailer, we provide empirical evidence that small retailers stockpile through IBF especially prior to shopping seasons and holidays. Furthermore, through Double Machine Learning, we estimate that small retailers shorten the planning horizon by 18% of their lead time during the stockpiling phase or reduce the loan amount by 15% for single-period loan when facing a 1% increase in the interest rate.

Keywords: Inventory-based financing, Operations-finance interface, Empirical research

Suggested Citation

Chen, Hongyu and Zhu, Weiming, Retailer Initiated Inventory-Based Financing (February 1, 2022). IESE Business School Working Paper, Available at SSRN: https://ssrn.com/abstract=3974181. or http://dx.doi.org/10.2139/ssrn.3974181

Hongyu Chen

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Peking University - School of Mathematical Sciences ( email )

Peking
China

Weiming Zhu (Contact Author)

HKU Business School, The University of Hong Kong ( email )

Hong Kong
China

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