Research On Trade Credit As An Incentive Mechanism For Coordination Management Of Supply Chain

Trade credit is referred to as the debtor-creditor relationship between enterprises which are participating in the normal trading activities of products or services, as a result of the deferred payment or payment in advance. Trade credit is a type of direct credit associated with the real transaction activities among firms. In the modern business practice, trade credit has been more and more widely used, since it usually has the characteristics of signaling transmission, price discrimination, transactions cost advantages, short-term financing, etc. Currently, in the field of finance or operations management, there have been quite a number of articles at home and abroad devoted to the study of trade credit issues. In recent years, with the development of the practice of supply chain management, the academic circles begin to pay attention to the status and role of trade credit in the collaboration management of supply chain, and mainly focus on the impact of trade credit in the form of delayed payment on supply chain performance. Nevertheless, trade credit as an incentive mechanism in which prepayment is treated as an endogenous variable, and the combined incentives mechanism consisting of trade credit and other coordination contracts are rarely involved in the previous literature on supply chain management.The purpose of this dissertation is to investigate trade credit as an incentive mechanism for coordination management of supply chain. We analyze the stimulation or compensation effect of trade credit on supply chain members, and explore the influence of trade credit as an incentive mechanism on the performance of coordination management of supply chain, then discuss the reasonable allocation of profit gains or cost savings of supply chain system. We also present the combined incentives mechanism which is composed of trade credit and other coordination contracts(i.e., revenue sharing, two-ordering strategy, etc.). The full text is divided into seven chapters. The first chapter expounds the background and significance of this dissertation, the main research issues and contributions. The relevant research literature on the fundamental theory of trade credit, the interaction relationship between trade credit and operational decisions, and coordination mechanisms in the area of supply chain management is reviewed and summarized in Chapter 2.In Chapter 3, we study trade credit in the form of advance payment as an incentive mechanism under the scenario where the manufacturer provides a certain quantity discount for the retailer. It is shown that, for given values of the other parameters, when the market demand increases, or the production rate enhances, or the retailer's ordering cost rises, or the rate of return on investment of the manufacturer's capital falls, the optimal order quantity will increase. Besides, we need to consider the relative size of the rate of return on investment of supply chain members, while properly designing an incentive mechanism with trade credit. On one hand, the manufacturer and the retailer, through trade credit in the form of prepayment, could achieve the collaboration management in a decentralized supply chain, when the manufacturer's rate of return on investment is higher than the retailer's. On the other hand, if the manufacturer's rate of return on investment is relatively low, the manufacturer needn't provide any quantity discount for the sake of receiving more orders from the retailer, and could allow the retailer a permissible delay in payments as an incentive, in order to optimize or coordinate the retailer's purchasing strategy.In Chapter 4, we study trade credit as an incentive mechanism based on the sharing scheme of lead-time reduction cost under the scenario where lead time is controllable by the manufacturer. It is shown that, for given values of the other parameters, the optimal ordering quantity increases if the value of expediting factor of lead-time drops. In addition, for fixed values of the other parameters, when the value of safety-stock factor enlarges, or the variance of lead-time demand enhances, or the rate of return of capital on investment increases, the optimal length of lead-time will be shortened.We could also show that, if the value of cost coefficient of lead-time reduction is small enough, through designing an incentive mechanism with trade credit in the form of prepayment based on cost-sharing scheme, the manufacturer is able to earn the considerable cost savings, which are even more than that in the scenario where the manufacturer only offers the retailer a permissible delay in payment, in the meanwhile, the retailer's annual average total cost doesn't rise at all. However, when the greater value of cost coefficient of lead-time reduction may result in the possibility that the manufacturer would become unprofitable, the manufacturer will give up an additional investment for shortening lead time, and the retailer's ordering policy could be coordinated through providing an incentive mechanism with trade credit in the form of delay in payment. Furthermore, depending upon the individual relative risk-aversion attitude, the manufacturer and the retailer can equally split the optimal cost savings of supply chain system using the Nash bargaining model, and realize the mutual improvement of their annual average total costs.In Chapter 5, we study the incentive mechanism with trade credit based on price rebate under the scenario where the manufacturer is willing to give the direct price rebate to the consumers. It is shown that, for given values of the other parameters, the retailer's optimal ordering quantity will increase as the direct price rebate offered by the manufacturer rises. Thus, the manufacturer could establish this type of price-rebate scheme to induce the retailer's ordering behavior or purchasing policy.We could also show that, for the specific market environment with different price elasticity of demand, it is necessary to design the flexible incentive mechanism with trade credit. Firstly, the manufacturer isn't willing to give any price rebate to the consumers if the market demand is price-inelastic or not elastic enough. Thus, the manufacturer have to offer the retailer trade credit(i.e., allowing the retailer a permissible delay in payments) as an incentive, to coordinate the retailer's ordering policy. Secondly, when the market demand is price-elastic or relatively sensitive to the actual retail price, the manufacturer, with the use of the incentive mechanism with trade credit based on price rebate, could obtain more annual average total profits than his or her own initial profits, even more than with the only trade-credit as incentive mechanism, whereas the retailer's annual average total profits don't decrease. Furthermore, depending upon their relative risk-aversion attitude and bargaining power, the manufacturer and the retailer can reasonably distribute the optimal profit gains of supply chain system in the asymmetric Nash bargaining model, and realize the simultaneous improvement of their individual profits.In Chapter 6, we study a combined incentives mechanism consisting of trade credit and revenue-sharing(or two-ordering strategy) under the scenario where the stochastic demand is dependent on the retailer's sales promotion effort. It is shown that, for given values of the other parameters, the retailer's promotion effort and ordering quantity will increase as the manufacturer's promotion reimbursement rate increases. Moreover, the retailer's promotion effort and ordering quantity will increase(or decrease), when the trade credit period offered(or demanded) by the manufacturer lengthens.We could also show that, although a single cooperative promotion plan can encourage the retailer to increase the promotion effort to the optimal level of supply chain system, the retailer's order quantity is not large enough. So, through the combined incentive mechanism consists of trade credit as well as revenue sharing, the retailer's order quantity and promotion effort will reach the optimal level of the centralized system, and the operating performance of the decentralized supply chain will also be improved. Meanwhile, in the market environment with distributon-free demand, for the bigger volatility of market demand, the combined incentives mechanism can more effectively diversify the risk among supply chain members, and fully plays a role in coordinating the decentralized supply chain. Moreover, we present a new combined incentives mechanism consisting of trade credit and reordering strategy. By properly adjusting the related parameters of the above combined incentives mechanism, we can arbitrarily split the total expected profits of supply chain, and thus realize the perfect coordination of the decentralized supply chain.In Chapter 7, we summarize the conclusions, and point out the flaws and future research directions of this dissertation. The main contributions of this dissertation are as follows:(i)We design a trade-credit based incentive mechanism where the prepaid credit period is treated as an endogenous variable, and reveal the stimulation or compensation effect of trade credit in the form of prepayment on the members. However, trade credit is usually considered as a fixed exogenous variable in the previous literature.In recent years, a number of researchers begin to pay attention to the role of trade credit coordinating supply chain, but focus on trade credit in the form of deferred payment often treated as the fixed exogenous variable. In reality, the prepayment among node firms often occurs, which is related to the interests of the members. So we regard trade credit in the form of prepayment as an endogenous variable, so as to make it fully play a role in stimulating or compensating the members. This is our main contribution throughout the dissertation.First, for the given quantity discount offered by the manufacturer, we design an incentive mechanism in which the retailer is required to pay in advance, to optimize and coordinate the retailer's ordering policy in the decentralized supply chain. Then, we assume that the manufacturer can reduce lead time through an additional investment, and consider lead time as the manufacturer's decision variable, meanwhile, trade credit in the form of prepayment is still treated as an incentive tool, we study the joint optimization and coordination of the order quantity, the lead time, and the credit period of supply chain members.(ii)We propose an incentive mechanism with trade credit based on price rebate, and obtain the optimal order quantity, the optimal price rebate rate, and the optimal prepaid credit period of the members, then analyze the impact of relative risk aversion attitude and bargaining power of the members on the distribution of system's profit gains.In real life, the popular business behavior which the manufacturer directly offers price rebate to the terminal consumers has received very little attention in the existing literature. The related theoretical research and its applications are still far behind the business practice. Thus, We study coordination management issues in a decentralized supply chain, while considering the effect of manufacturer's direct price rebate on the market demand, through designing the incentives mechanism with trade credit based on price rebate, and derive jointly coordinated strategies of supply chain members for operations, marketing and financial management, including the optimal order quantity, the optimal price rebate rate and the optimal prepaid credit period. Moreover, we analyze the effects of relative risk-aversion attitude and bargaining power of the members on the distribution of incremental profits of supply chain system. This is also one of the contributions of the dissertation.(iii)We propose the combined incentives mechanism consisting of trade credit and revenue-sharing(or reordering policy), under the scenarios where demand distribution is known or unknown, respectively. Moreover, we verify that the combined incentives mechanism could boost the performance of coordination management of supply chain.The stochastic demand is assumed to depend on retailer's promotion effort. Under the scenarios where stochastic disturbance term follows any distribution or demand distribution is unknown, we reveal the role of the combined incentives mechanism consists of trade credit and revenue-sharing in coordinating or compensating the interests of supply chain members, and explore the effect of demand volatility on the performance of supply chain coordination management. Providing that the retailer might have the second ordering opportunity at the end of the season, we further propose a new combined incentives mechanism consisting of trade credit and reordering strategy which also realizes the perfect coordination of supply chain.