Optimal Trade Credit Research Articles

Optimal dynamic trade credit and preservation technology allocation for a deteriorating inventory model

In this paper, we examine an optimal dynamic decision-making problem for a retailer selling a single deteriorating product, the demand rate of which varies simultaneously with time and the length of credit period that is offered to the customers. The deterioration rate is time dependent and can be reduced by an investment in preservation technology. In addition, the risk of default increases with the credit period length. A generalized model is presented to determine the optimal trade credit, preservation technology investment and replenishment strategies that maximize the retailer’s total profit after the default risk occurs over a finite planning horizon. Under certain conditions, we first establish a single period deteriorating inventory model, and then provide a comparative statics analysis that characterizes the impacts of key parameters on the retailer’s optimal trade credit and preservation technology investment decisions by using the properties of the supermodular function. Dynamic programming is then used to solve the proposed model by employing the obtained theoretical results. At the end of this paper, some numerical examples and the results of a sensitivity analysis are used to illustrate the features of the proposed model; we then offer our concluding remarks.

A note on “Seller’s optimal credit period and cycle time in a supply chain for deteriorating items with maximum lifetime”

In 2014, Wang et al. (2014) extended the model of Lou and Wang (2012) to incorporate the credit period dependent demand and default risk for deteriorating items with maximum lifetime. However, the rates of demand, default risk and deterioration in the model of Wang et al. (2014) are assumed to be specific functions of credit period which limits the contributions. In this note, we first generalize the theoretical results of Wang et al. (2014) under some certain conditions. Furthermore, we also present some structural results instead of a numerical analysis on variation of optimal replenishment and trade credit strategies with respect to key parameters.

The Use of Trade Credit by Public and Private Firms: An Empirical Investigation

We show that public firms use significantly less trade credit than private firms. The impact of listing status on the use of trade credit is more pronounced in young, high-growth, low-tangibility, and high-volatility firms, which is consistent with the argument that private firms with greater asymmetric information and credit constraints rely more on supplier financing. Public and private firms seek to adjust toward optimal trade credit levels, although public firms experience faster adjustment. During the recent financial crisis, public firms on average exhibited no significant change in their trade credit ratios, while private firms were granted significantly less trade credit.

Optimal trade credit and lot size policies in economic production quantity models with learning curve production costs

In reality, a seller (e.g., a supplier or a manufacturer) frequently offers his/her buyers trade credit (e.g., permissible delay in payment). Trade credit reduces the buyer's holding cost of inventory and hence attracts new buyers who consider it to be a type of price reduction. On the other hand, granting trade credit also increases the seller's opportunity cost (i.e., the loss of capital opportunity during the credit period) and default risk (i.e., the event in which the buyer will be unable to make the required payments on his/her debt obligation). In addition, it is a well-known fact of learning-by-doing that production cost of a new product declines by a factor of from 10 to 50 percent each time the accumulated production volume doubles. Therefore, we propose an economic production quantity model from the seller's prospective to determine his/her optimal trade credit period and production lot size simultaneously in which (i) trade credit increases not only sales but also opportunity cost and default risk, and (ii) production cost declines and obeys a learning curve phenomenon. Then the necessary and sufficient conditions to obtain the seller's optimal trade credit and order quantity are derived. Finally, we use some numerical examples to illustrate the theoretical results and to provide some managerial insights.

CREDIT MANAGEMENT ANALYSIS OF SEMI-INTENSIVE SHRIMP FARMING IN MEXICO

Credit management (funding source with its specific interest rate, its timing, and amount) and its trade, affect feasibility of commercial shrimp farming. To analyze optimal trade credit management, an existing bioeconomic model of a semi-intensive shrimp farm (139 hectares with 44 earthen ponds) located in Sinaloa, Mexico, was extended to create a framework that assesses the decision-making problem related to funding from input suppliers (feed and postlarvae) during one culture cycle, integrating stochastic factors like shrimp mortality and pond water temperature. Through the application of Monte Carlo simulation and genetic algorithm-based optimization techniques, results show that the minimum funding cost is US$15,710 (for an operation budget of US$603,790), 27% lower than alternative funding scenarios (P-value <0.001). Although framed at the firm level, this approach optimizes any funding planning scenario in short-term credit management, particularly in funding schemes involving input suppliers. Further research is needed to relate credit management at the firm level with other elements of the value chain.

Optimal trade credit and order quantity when trade credit impacts on both demand rate and default risk

In practice, to attract new buyers and to avoid lasting price competition, a seller frequently offers its buyers a permissible delay in payment (ie, trade credit). However, the policy of granting a permissible delay in payment adds an additional dimension of default risk to the seller. In contrast to previous researchers for finding optimal solutions to buyers, we first propose an economic order quantity model from the seller's prospective to determine its optimal trade credit and order quantity simultaneously. In addition, we incorporate the important and relevant fact that trade credit has a positive impact on demand rate but a negative impact on receiving the buyer's debt obligations. Then the necessary and sufficient conditions to obtain the seller's optimal trade credit and order quantity are derived. An algorithm to determine the seller's optimal trade credit is also proposed. Finally, we use some numerical examples to illustrate the theoretical results and to provide some managerial insights.

Determination of the optimal trade credit policy: a supplier-Stackelberg model

This paper considers a two-echelon supply chain, where one supplier sells through a retailer a product with a stable market demand. We focus on how the supplier induces the retailer through trade credit to order more to reduce his/her own inventory-related cost. Under a ‘supplier-Stackelberg’ setting, we provide the supplier with the method of determining two trade credit scenarios: unconditional and conditional trade credit. We show that the unconditional trade credit scenario is always beneficial to the retailer but harmful to the supplier in most situations, while the conditional trade credit scenario is always beneficial to both parties. In addition, we specify the conditions under which the provision of unconditional trade credit is beneficial to the supplier. The three insights obtained in this paper are the following: (i) When the retailer’s per-unit opportunity cost is less than his/her per-unit opportunity gain, unconditional trade credit can induce the retailer to order less instead of more. (ii) If the supplier offers the retailer unconditional trade credit, the length of trade credit offered will have an upper bound. (iii) A well-designed conditional trade credit policy can realize a win-win outcome but also enables the supplier to occupy all the savings in the channel's cost incurred by trade credit, but any unconditional trade credit policy does not.

Optimal trade-credit policy for perishable items deeming imperfect production and stock dependent demand

Optimal trade-credit policy for perishable items deeming imperfect production and stock dependent demand

The model and algorithm for determining optimal ordering/trade-credit policy of supply chains

This paper develops a model for determining ordering/trade-credit policy of a supply chain, where one supplier sells a product to a retailer, who faces a deterministic demand, and may offer the retailer two types of trade credit contracts: a “one-part” or a “two-part” contract. We discuss the existence of the optimal solution to the model, and provide a simple algorithm for finding the optimal ordering and trade credit policy of two members. We specify the conditions under which it is beneficial in reducing operational cost for the supplier to offer the two trade credit contracts. Through numerical experiments, we reveal that it is more superior in reducing operational cost for the supplier to offer a two-part credit than to offer a one-part credit, which can be extended to a multi-part credit. The sensitivity analysis is presented at the end of the paper.

Improving the supply chain's performance through trade credit under inventory-dependent demand and limited storage capacity

Abstract The present paper develops a performance-improving model through trade credit for a two-echelon supply chain, where a supplier sells a single product through a retailer who has limited storage space and faces an inventory-dependent end demand. We consider the non-integrated and integrated optimizing model. Under the non-integrated optimizing model, we present how the supplier determines the trade credit period to induce the retailer ordering more so as to reduce the supplier's operating cost and enhance sales volume of products as well. The proposed model shows that the presented trade credit policy can increase each member's profitability but also the profitability of the whole channel. Furthermore, we develop a theorem to efficiently determine the optimal inventory and trade credit policy for the integrated optimizing model.

In This Issue

In This Issue

Financing the Newsvendor: Supplier vs. Bank, and the Structure of Optimal Trade Credit Contracts

We consider a supply chain with a retailer and a supplier: A newsvendor-like retailer has a single opportunity to order a product from a supplier to satisfy future uncertain demand. Both the retailer and supplier are capital constrained and in need of short-term financing. In the presence of bankruptcy risks for both the retailer and supplier, we model their strategic interaction as a Stackelberg game with the supplier as the leader. We use the supplier early payment discount scheme as a decision framework to analyze all decisions involved in optimally structuring the trade credit contract (discounted wholesale price if paying early, financing rate if delaying payment) from the supplier's perspective. Under mild assumptions we conclude that a risk-neutral supplier should always finance the retailer at rates less than or equal to the risk-free rate. The retailer, if offered an optimally structured trade credit contract, will always prefer supplier financing to bank financing. Furthermore, under optimal trade credit contracts, both the supplier's profit and supply chain efficiency improve, and the retailer might improve his profits relative to under bank financing (or equivalently, a rich retailer under wholesale price contracts), depending on his current “wealth” (working capital and collateral).

Trade Credit in Supply Chains: Multiple Creditors and Priority Rules

Priority rules determine the order of repayment when the debtor cannot repay all of his debt. In this paper, we study how different priority rules influence trade credit usage and supply chain efficiency when multiple creditors are present. We find that with only demand risk, when the wholesale price is exogenous, trade credit with high priority can lead to high chain efficiency, yet trade credit with low priority allows more retailers to obtain trade credit and suppliers to gain higher profits. When the supplier has control of the wholesale price, however, we show that the supplier should extend unlimited trade credit with net terms. We also study the case when demand risk mingles with other risks, especially those with longer terms. Under this setting, we show several scenarios when the optimal trade credit policy should change according to different risks and that, in general, trade credit with low priority results in high chain efficiency. Finally, we use empirical data to show that, at an aggregate level, trade credit usage reacts to changes in the law according to our theory.

An incentive-compatible solution for trade credit term incorporating default risk

This paper studies the optimal trade credit term decision in an extended economic ordering quantity (EOQ) framework that incorporates a default risk component. A principal-agent bilevel programming model with costs minimization objectives is set up to derive the incentive-compatible credit term. The supplier determines the credit term as the leader in the first level programming, by balancing her/his financing capacity with the retailer’s default risk, order behavior and cost shifting. At the second level, the retailer makes decisions on ordering and payment time by reacting on the term offered by the supplier. A first order condition solution procedure is derived for the bilevel programming when credit term is confined within the practically feasible interval. Two key results are obtained – the condition to derive incentive-compatible credit term, and an equation system to derive threshold default risk criterion filtering retailers suitable for credit granting. Numerical experiments show that the capital cost of the supplier is the most important factor determining the credit term. Default risk acts like a filtering criterion for selecting retailers suitable for credit granting. Empirical evidence supporting our theoretical considerations is obtained by estimating three panel econometric models, using a dataset from China’s listed companies.

Coordination contracts in the presence of positive inventory financing costs

Numerous studies have offered diverse contractual forms of alliance, in which the supply chain partners coordinate their decisions for greater joint performance in an entirely self-interested way. Prior literature implicitly assumes free inventory financing. However, this assumption is questionable in the real marketplace. Firms frequently finance their working capital from a variety of credit sources, such as banks, and incur positive costs of the funds for inventory. Surprisingly, the impact of inventory financing costs on supply chain coordination has not been sufficiently investigated by supply chain academics. We address this issue by explicitly assuming capital-constrained agents and positive inventory financing costs. Specifically, we consider four extensively discussed coordination mechanisms for investigation: (i) all-unit quantity discount, (ii) buybacks, (iii) two-part tariff, and (iv) revenue-sharing. We show that, under the assumption of positive inventory financing costs, these contracts fail to achieve joint profit maximization if each agent relies on direct financing from a financial institution. Positive financing costs call for trade-credit in order to subsidize the retailer's costs of inventory financing. Using trade-credit in addition to the contracts, the supplier fully coordinates the supply chain for the largest joint profits. Moreover, positive inventory financing costs make revenue-sharing less profitable than the other three contracts. We present three different schemes for coordination in a decentralized supply chain, using buybacks, quantity discount, and two-part tariff, respectively. We also derive the optimal trade-credit rate not only for the supplier's profit, but also for joint supply chain profit.

Optimal unit price and credit period for price sensitive demand and random supply

In this study, the authors develop a supplier-retailer optimal integrated strategy where the retailer's demand is price sensitive and the supplier's supply is random. It is assumed that the supplier's supply follows a normal distribution and the supplier may offer credit period to the retailer. The expected profit is maximised with respect to the unit price charged and the credit period offered by the supplier. The computational steps are provided to obtain the supplier's and the retailer's decision variables under individual (non-cooperative) as well as joint (cooperative) strategies. The sensitivity analysis of the parameters is carried out using a numerical example. The authors observe that it is beneficial to consider negotiating the optimal pricing and trade credit policies.

The product differentiation hypothesis for corporate trade credit

AbstractThe product differentiation hypothesis for trade credit says that business managers use trade credit like advertising to differentiate their products. Prior studies of this hypothesis conclude that higher profit margins induce firms to increase trade credit and vice versa. We better represent the relation between the cost of bad debts and the price of the product offered on credit. When prices are higher, firms suffer greater losses from non‐payment. Our model shows that, contrary to early versions of the product differentiation hypothesis, when managers adjust trade credit and profit margins for a perturbation in marginal cost, optimal profit margin and trade credit may move in opposite directions. A manager maintains revenue for price elastic demand by moderating the price increase, which decreases profit margin. At the same time, the manager also increases trade credit, which serves to maintain revenue by encouraging product demand. We report evidence of a negative relation between corporate receivables and profit margin. Copyright © 2003 John Wiley &amp; Sons, Ltd.