Two-echelon supply chain network design with trade credit

Abstract

This study considers a two-echelon supply chain that is comprised of an outside vendor, multiple distribution centers (DCs), and multiple retailers. The retailers have access to trade credit offered by upstream suppliers. We propose an integrated DC-retailer network design model that optimizes trade credit terms and safety stock levels, in addition to the decisions of DC locations, DC-retailer assignments, and inventory replenishment policies typically considered in the literature. The operating and handling cost is concave and non-decreasing to capture economies of scale whereas most existing studies simply assume that such cost is linear in demand. Trade credit financing cost is characterized in a way that preserves the important mathematical structure of the classic warehouse retailer network design model. Leveraging on the submodularity property of the cost components, we developed a polymatroid cutting-plane solution algorithm, which is effective for practically sized problem instances in numerical experiments. The results show that incorporating trade credit financing into supply chain network design may substantially reduce the total cost. Further, our study suggests a more consolidated supply chain network when either the safety stock or financing cost increases. Interestingly, as financing cost rises, a high-volume and low-frequency reorder pattern is favored, but the opposite is recommended when financing gain increases. The variation of each individual cost component is also analyzed for an in-depth understanding of the impact of operational and financial parameters on supply chain optimization.