Optimal trade credit with deferred payment and multiple decision attributes in supply chain finance

Abstract

This paper studies a supply chain with a core manufacturer and a financially constrained retailer in the context of an imperfect capital market. We examine the capital-constrained decision objectives of profit maximization with and without bankruptcy costs, and extend to the multi-attribute utility (MAU) maximization, including attributes of expected sales revenue, bankruptcy cost, and service level. Interestingly, we find that in an imperfect capital market, the optimal order quantity for the capital-constrained retailer with trade credit financing may exceed the well-funded order quantity, depending on the bankruptcy costs and the retailer’s preferences on decision-making attributes, which reflects that trade credit may encourage the retailer to increase order size and thus to further improve the overall profitability of the supply chain. However, this incentive effect vanishes when the bankruptcy cost is relative high or high attention has been paid to the bankruptcy costs, and then the optimal order size would be smaller than that for expected profit maximization.