Supply chain coordination under credit risk with informational effort

Abstract

This paper considers a decentralised supplier–retailer channel, in which providing trade credit to end-customers incurs credit risk. Informational effort can be made to mitigate credit risk but incurs a cost. The retailer makes the optimal credit period and informational effort decisions to maximise his/her profit, which leads to unaligned decisions. Based on the inventory model, this paper focuses on supply chain coordination when credit risk is uncertain and credit-period-dependent. Our results show that informational effort cost-sharing alone cannot achieve channel coordination and that it actually has an adverse effect on supply chain profits. A composite contract (coupling informational effort cost-sharing with credit risk cost-sharing) is proposed to coordinate the channel. In the contract, the profit sharing between both parties depends on the wholesale price (Pareto improvement) for fixed retail prices and purchasing costs. We also provide evidence that the credit period of suppliers is shorter than that of retailer when the supplier shares the retailer’s informational effort cost.