The impact of trade credit on information sharing in a supply chain

Abstract

Trade credit is a financing tool commonly practiced in supply chains. While a substantial literature has examined various aspects of trade credit, its impact on information sharing in supply chains has not been well studied. We address this research gap by considering a decentralized supply chain where a capital-constrained retailer with superior demand information orders products from a manufacturer. The manufacturer may offer trade credit, whereas the retailer may disclose her private demand information to the manufacturer. We focus on how the manufacturer’s offering of trade credit affects the retailer’s information sharing decision and supply chain performance. Our findings show that, without trade credit, the retailer shares information when her available capital is tight or when both the information accuracy and demand volatility are high. With trade credit, the retailer shares information when the demand volatility is high, and may or may not do so otherwise. Furthermore, we identify conditions under which the offering of trade credit benefits both, exactly one, or none of the supply chain members.