Research On Trade Credit As A Supply Chain Coordination Mechanism

Trade credit, including delayed payment and prepayment, is the credit used during the transactions of products or services between firms. The widely used trade credit has the effects of alleviating budget constraint, delivering information of the quality of products, being a competing weapon and coordinating supply chain. Trade credit is also the important way of short term finance and a factor considered by firms in products and services transactions.The popularity and importance of trade credit have attracted close attention of academics who have widely studied the relations between trade credit and inventory from the view point of operations management. Lots of papers have focused on deriving the buyer’s optimal inventory policy when the supplier’s trade credit policy is given. However, nearly all of these papers failed in addressing the credit risk, finance function and supply chain coordinating role of trade credit which are the important aspects considered by firms in practice. That is, there are many gaps between theory and practice.The dissertation is aimed to fill these gaps and study the influence of trade credit on supply chain coordination from the view of supply chain management. The contents of this desertion include: the supplier’s inventory allocation policy and its impact on supply chain coordination when trade credit and its risk are given; how to use trade credit to coordinate supply chain; how to examine the relation between trade credit and inventory empirically. In addition, the ration of loan-to-value is also addressed by this dissertation when the credit is supplied by the third party such as banks or logistics providers.There are seven chapters in this dissertation. The first chapter introduces the background, the main contents and the innovations of this dissertation. Chapter two provides the literature review.The third chapter studies the influences of trade credit and its risk on supply chain coordination and examined whether the conclusions in previous literature are still true when trade credit and its risk are considered. There is a commonly believed conclusion that, in the decentralized supply chain, the retailer’s order size is less than the supply chain’s order size and thus the supplier should encourage the retailer to enlarge his order size. However, this conclusion is derived by neglecting trade credit and its risk and thus the conclusion should be examined by considering trade credit and its risk. This dissertation analyzes this issue and examines whether it is still the supplier’s optimal choice to enlarge the retailer’s order size. It is proved that the supplier will choose to deliver less than the retailer’s order size to reduce the risk when the final demand of the product is very variable or the retailer has high default risk which means the commonly believed conclusion is not the truth under such circumstance. When the supplier chooses to allocate less order size, the supply chain is not coordinated which means the non-coordination of supply chain may be caused not just by the retailer’s less order size but may caused by the supplier’s less allocated size. This conclusion demonstrates that the arrangements of capital flows also have effective influences on supply chain coordination.When the supply chain is not operated in the optimal situation, the retailer can improve the supply chain by paying the supplier before the supplier delivers products. In the practice of C2C e-business, the payments risk is much higher because the buyer and the supplier are all individuals. In this situation, the credit risk can’t be solved by prepayment or delayed payment. The tool called“Payment treasure”which is developed by Taobao is an effective method in reducing the risk in online business. When the parties of supply chain have established long term relation or the buyer is in good situation of capital flows, the risk of trade credit can be neglected. Under these circumstances, the supplier can use the quantity dependent trade credit to encourage the buyer to enlarge his order size and thus achieve supply chain coordination.In chapter four the relation between trade credit and buyer’s order size is empirically examined and the conclusions support the trade credit’s function in coordinating supply chain. Then we present several models to demonstrate how to use trade credit to coordinate supply chain under different situations. In specific, this chapter firstly examines the relation between trade credit and buyer’s order size by using the data of Chinese public companies of auto industry and showed that trade credit can enlarge order size and thus can be used as a supply chain coordination mechanism. In the empirical study, days of inventory is used as dependent variable while days of payment is used as the indicator of trade credit and independent variable and other factors which can influence the inventory level are set as control variables. The data used in regression is got from the annual financial reports of 44 companies from 1995-2004. The conclusions show that the days of inventory is significantly and positively related to days of payment which means the supplier’s trade credit can be used in enlarging the buyer’s order size.Then this chapter uses trade credit as a coordination mechanism and studies the issue of coordination of supply chain when the products are perishable and the demand is stock dependent. The length of the trade credit is also derived by using the Nash Bargaining model. The conclusions show that the trade credit in the form of delayed payment can be used to coordinate supply chain and the length of the trade credit are positively related to the bargaining power of the retailer which is also coincide with intuition and the firm’s practice.Based on chapter four, chapter five analyzes the issues of supply chain coordination with trade credit in the situation of information asymmetry. In the real world, information completeness is rare and the firms of a supply chain are always have all the information about themselves but inaccurate information about others. In a supply chain composed of one manufacturer and one retailer, when the manufacturer lacks the information of the retailer’s capital cost, the manufacturer can get the minimization of expected cost by offering menu of contracts. However, when there is information asymmetry the supply chain can’t be coordinated. In the situation of bilateral information asymmetry, the manufacturer and the retailer all lack the information about each other’s information of capital cost. Based on the K-double auction, we provide the optimal strategies of the manufacturer and the retailer. Chapter six studies the supply chain coordination with trade credit in the situation when the demand is stochastic and the buyer is budget constraint. In addition, the service of inventory financing can be viewed as the trade credit supplied by third party and will be very useful when the supplier and the buyer are all budget constraint. We address this issue by considering the optimal ration of loan-to-value which is the most important theory issue in this kind of service.In specific, the supplier’s optimal trade credit policy is addressed by considering the buyer’s budget constraint and the stochastic demand. The advantages of the trade credit as a supply chain coordination mechanism are also demonstrated. That is when the buyer is budget constraint trade credit which has the function of financing will be the only choice to coordinate the supply chain. In addition, when the budget constraint buyer procures from multiple suppliers, one supplier’s trade credit can coordinate his supply chain and at the same time enlarge the other supplier’s sale which means trade credit has positive externality.Then chapter six studies the ration of loan-to-value when the credit is provided by the third party such as banks, logistics service providers in the form of inventory financing. The trade credit supplied by the supplier is constraint by the supplier’s capital flow and when the supplier has budget constraint trade credit will not be provided. When this is the truth, the inventory financing provided by the third party can be used to facilitate the transactions between supplier and buyer. In the service of inventory financing, the optimal ration of loan-to-value for the third party is the main decision. We analyze this issues by considering the customer’s risk caused by the demand variation of the products and the risk attitudes of the third party, such as risk aversion, loss aversion are also considered. It is proved that when the third party is risk averse, the optimal ration of loan-to-value is lower than that of risk neutral.Chapter seven discusses the conclusions and future research directions of this dissertation.Through theoretical and empirical study, this dissertation provides several new insights of supply chain coordination. The main innovations of this dissertation are as follows.(1) We demonstrate the advantage of trade credit as a supply chain coordinate mechanism. That is when the buyer has budget constrain, trade credit with finance function will be the only choice to coordinate supply chain while other mechanisms without finance function will be helpless. The finance function of trade credit demonstrates its importance in practice and theory.Budget constraint is an serious problem faced by the fast growing companies especially the retailers. At the same time, in the developing countries, budget constraint is also a problem for many companies. From the point view of supply chain, when the buyer has budget constraint, his order size will be lower and the supply chain will not be operated in the optimal situation. The commonly used mechanism like quantity discount, rebate etc, will be useless in coordinating supply chain while trade credit with finance function can be used to coordinate supply chain. And it is in this dissertation that the advantage of trade credit is firstly pointed out. The advantage of trade credit in coordinating supply chain explains the faster development of the industry which is more dependent on trade credit in developing countries.(2) For the first time, we analyzed the influence of credit risk on supply chain coordination and pointed out that the supplier will not encourage the retailer to enlarge his order size. The conclusion demonstrates another factor that hampers supply chain coordination that is the supplier will want to reduce the inventory allocation to the retailer.In previous literature of supply chain coordination, the commonly used trade credit and its associate risk are not considered. When the supplier has no risk in getting the payment his optimal choice is to enlarge the retailer’s order size to achieve supply chain coordination. However, in this dissertation, we proved that when the trade credit and its risk are considered the supplier has three different choices depending on the parameters and enlarging is only one of them. The other two choices are reducing the retailer’s order size and enlarging the retailer’s order size but not up to the supply chain’s optimal size. Hence, the conclusions of this dissertation offer more explanations about the factors that hamper supply chain coordination and the influences of payment arrangement on supply chain performance is also demonstrated by the conclusions.(3) Supply chain coordination with trade credit under bilateral information incompleteness is addressed and the firms’optimal strategies are derived when they have no accurate information about each other’s capital costs. The influences of bilateral information incompleteness on supply chain coordination is also addressed. The analysis of bilateral information incompleteness improved the existing research which considers only one side information incompleteness.Information asymmetry (incompleteness) has important impact on supply chain coordination and one side information asymmetry has been addressed by previous literature. In the situation of one side information incompleteness, one party has all the information while the other one only has part of the information needed in supply chain coordination. The researches about one side information asymmetry have focused about how to screen or how to signal the asymmetric information. While in the situation of bilateral information incompleteness, all the parties don’t know the accurate information of their counterparts. We analyze the influence of bilateral information incompleteness for the first time in the field of supply chain management and the firms’optimal strategies are derived. (4) Based on the data of Chinese firms, we empirically examined the relation between trade credit and inventory policy, proved the positive relation between days of account payable and days of inventory, demonstrated the incentive effect of trade credit on inventory order size and supported the idea of using trade credit as supply chain coordination mechanism. This empirical study filled the gap of the literature of supply chain coordination with trade credit.Most of the existing papers used quantity model in analyzing the relation between trade credit and inventory and few empirical study was presented to examine the conclusions of these papers. Meanwhile, more and more papers begin to treat trade credit as a supply chain coordination mechanism. The premise of taking trade credit as a supply chain coordination mechanism is that trade credit can influence the buyer’s order size. The empirical study proves the effect of trade credit on enlarging the buyer’s order size and supports the idea of setting trade credit as a supply chain coordination mechanism. In addition, the empirical researches about inventory neglected the influence of trade credit which is proved to be unreasonable and the supplier’s trade credit is also an important factor when the buyer decides his optimal order size.