Purchase order financing: credit, commitment, and supply chain consequences

M.J. Reindorp, F. Tanrisever, A. Lange

Research output: Contribution to journalArticleAcademicpeer-review

18 Citations (Scopus)
1 Downloads (Pure)

Abstract

We study a supply chain where a retailer buys from a supplier who faces financial constraints. 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. We also indicate limits to the commitment approach: under certain conditions, the retailer may prefer to relax the supplier’s financial constraint by adjusting the wholesale price, or a combination of wholesale price and commitment. Our study provides a novel perspective on capital market frictions in supply chains.

Original languageEnglish
Pages (from-to)1287-1303
Number of pages17
JournalOperations Research
Volume66
Issue number5
Early online date14 Aug 2018
DOIs
Publication statusPublished - 1 Sep 2018

Keywords

  • Capital constraints
  • Imperfect financial markets
  • Informational transparency
  • Purchase order financing

Fingerprint

Dive into the research topics of 'Purchase order financing: credit, commitment, and supply chain consequences'. Together they form a unique fingerprint.

Cite this