Purchase Order Financing Research Articles

Buyer-Backed Purchase Order and Advance Payment Discount Financing Under Carbon Trade Revenue-Sharing Contract

The promotion of low-carbon production is a crucial aspect of sustainable development, and carbon trading has proven to be an effective means of achieving this goal. However, the limited capital hinders small and medium-sized enterprises (SMEs) from achieving low-carbon production. Thus, this paper examines a low-carbon supply chain comprising a financially constrained manufacturer and a well-funded retailer. We propose a game-theoretical model that addresses the financial constraints of the manufacturer through buyer-backed purchase order financing (BPOF) or advance payment discount (APD) with carbon trading revenue-sharing contracts. We investigate the determination of pricing and carbon emission reduction strategies by firms utilizing diverse financing models. We find that the total amount of carbon emission reduction increases with the manufacturer’s carbon trade revenue-sharing ratio. The financing rate of BPOF has a negative impact on the amount of carbon emission reduction, while the discount rate of APD will not affect either the carbon emission reduction or the revenue of the supply chain. Among the two financing strategies, APD is optimal for maximizing profit and promoting low-carbon development throughout the supply chain.

Joint decision of order allocation and lending in the multi-supplier scenario purchase order financing

As an effective financing method for suppliers to solve capital shortage problems before production, Purchase Order Financing (POF) has been widely used. However, in current practices of POF, the separation of the focal firm's order allocation decision and the financial institution's lending decision may inevitably cause the multi-supplier scenario POF business to fall into the dilemma of failed or non-optimal. To deal with this problem, a joint decision-making process is developed to address the deficiencies of the separate order allocation decision and lending decision, namely the information sharing and mutual participation between the focal firm and the financial institution. Then, based on the decision-making process and the interest analysis of all the parties involved, mathematical models for both the joint and separate decisions of order allocation and lending are constructed. After that, an improved genetic algorithm (GA) is designed to solve problem. A numerical study and sensitivity analysis are used to verify the outperformance of the joint decision model and the improved GA. The result shows that the joint decision of order allocation and lending can increase the expected payoff of both the focal firm and the financial institution in the multi-supplier scenario POF.

Buyer-backed purchase-order financing for SME supplier with uncertain yield

Access to adequate working capital is often a challenge for SMEs, especially if SME faces the risk of an uncertain yield. We identify conditions under which a strong buyer should either offer “backing” or guarantee for the purchase-order finance for a cash-constrained, risky SME supplier, or end the relationship. By offering a backing, buyer shares the default risk faced by the bank, in order to keep the SME supplier in business. To identify the possible benefits of this scheme, we compare the buyer’s operational and financial decisions under three financing mechanisms: buyer-backed purchase order financing, purchase order financing with no backing and purchase order financing with a fixed buyer-backing. The non-linear optimization problem is solved using KKT optimality conditions and sufficiency is established through invexity. We perform numerical experiments for all the models for different levels of yield risks of the supplier. We are able to separate conditions to suggest when (1) no backing is required; (2) when backing should be offered to sustain the supplier, and (3) when an alternative supplier should be located.We find that backing has the following benefits: buyer can use backing as a substitute to higher purchase price; it helps the supplier to stay operative till a higher shock level; shared risk of default leads the bank to offer financing at a lower rate; finally resulting in consistently higher buyer profits despite the added risk. The separation condition as described above can also be used by managers to compare two suppliers.

The Value of Smart Contract in Trade Finance

Problem definition: Smart contract improves the supply chain efficiency by enabling the supplier’s commitment to postshipment financing decisions, which mitigates the bank’s lending risk exposure and thereby reduces the financing cost. This paper investigates how smart contract adoption could facilitate trade finance activities and create value for supply chain firms. Academic/practical relevance: As the emerging blockchain technology could potentially reshape the trade financing landscape, understanding the impact of smart contract adoption and its interaction with trade finance activities is practically relevant and of great importance. Methodology: We develop a two-stage game-theoretic model and adopt supply chain finance theory to characterize the strategic interactions between supply chain firms in the presence of both operational risk (demand uncertainty) and financial risks (credit and liquidity risks). Results: We find that the value of smart contract depends critically on the trade finance structures, including both preshipment and postshipment financing schemes. Under the baseline trade finance model (with purchase order financing as preshipment financing and factoring as postshipment financing), smart contract alleviates the supplier’s overpricing behavior caused by commitment frictions and helps restore the supply chain efficiency. When buyer direct financing serves as an alternative preshipment financing, smart contract might discourage the retailer from offering buyer direct financing, which significantly hurts the supplier and thus reduces the supply chain profit. When invoice trading serves as the alternative postshipment financing, the supplier always chooses invoice trading over factoring because of its trading flexibility, which in turn, makes the commitment frictions ubiquitous and unresolvable (namely, commitment trap). As a result, invoice trading could unexpectedly lead to a lower supplier’s profit. Luckily, such an adoption dilemma can be resolved by smart contract adoption in conjunction with factoring. Managerial implications: Our findings provide guidelines for and insights into when smart contract should be adopted and its interactions with different trade finance schemes. In particular, smart contract adoption does not always benefit the supply chain.

Implications of credit default and yield uncertainty on supply chain's equilibrium financial strategy.

Two financial schemes, i.e., purchase order financing (POF) and buyer direct financing (BDF), have been proposed for small and medium-sized manufacturers. This study considers a supply chain consisting of a capital-constrained manufacturer who faces the random yield and has a probability of credit default, a well-capitalized retailer, and a bank. We find that the manufacturer prefers POF scheme if the unit production cost is high and the default risk is low, and BDF scheme otherwise. Whereas the retailer benefits from POF when the unit production cost is small. Thus, the retailer, as the leader, has an incentive to distort the purchase price to induce the manufacturer’s financing strategy towards the retailer’s preference. Furthermore, only BDF can achieve a Pareto improvement since the retailer plays a dual role (i.e., buyer and lender) under BDF.

The impact of buyback support on financing strategies for a capital-constrained supplier

In this paper, we investigate the optimal operational decisions and financing strategies of a supply chain with one financial-constrained supplier and one reputable retailer. In particular, two pre-shipment financing mechanisms, buyback support buyer-backed purchase order financing (BSBPOF) and buyback support advance payment discount (BSAPD), are chosen to ease the supplier's financial pressures. Both financing methods indicate that the supplier promises to buy back the unsold items after the sales season, but the difference is that the former means that the financial institution lends money to the supplier which the retailer needs to guarantee, while the latter means that the retailer pays in advance. Our research shows that: 1) the difference between the buyback price of the unsold product and its salvage value has an impact on the optimal operational decisions (such as the supplier's capacity level, the discount rate under BSAPD, and the financial institution's interest rate under BSBPOF); 2) when both financing instruments are available, if the buyback price is above a certain level and the difference between the buyback price and the salvage value is less than a certain range, the financing equilibrium is BSBPOF. Otherwise, BSAPD is preferred. Furthermore, the results provide managerial insights on how to address the operational and financing issues, and relevant conclusions are drawn by extending the model to consider stockout costs.

Purchasing from multiple capital-constrained suppliers using order financing

Small and medium enterprises (SMEs) play a critical role in supply chains and social stability. Unfortunately, SMEs often lack access to traditional bank financing. To develop SME suppliers, some creditworthy companies have built platforms to coordinate banks and suppliers by employing purchase order financing (POF). After noting that SMEs differ in terms of their operational flexibility and uncertainty, this research examines optimal purchasing portfolios on such platforms. Specifically, we construct a Stackelberg model involving one buyer and two suppliers and analyse the Karush–Kuhn–Tucker necessary conditions for a buyer’s strategy upon which the optimal portfolio can be achieved. According to the experiments that we design to simulate about 200,000 various scenarios, the large buyer only needs to consider the top five strategies. The choice of strategy mainly depends on cost differences of suppliers, and flexibility can be used as an identifier of the purchase quantity.

Evolutionary Game Analysis of Capital-Constrained Supplier’s and Manufacturer’s Financing Schemes

Purchase order financing (POF) and buyer direct financing (BDF) are both innovative financing schemes aiming to help financial constrained suppliers secure financing for production. In this paper, we investigate the interaction mechanism between suppliers’ financing strategy selection and manufacturers’ loans offering strategy adoption under two innovative financing schemes. We developed an evolutionary game model to effectively investigate the interaction mechanism between suppliers and manufacturers and analyzed the evolutionary stable strategies of the game model. Then we used system dynamics to present the performance of the evolutionary game model and took a sensitivity analysis to verify the theoretical results. The main conclusions are as follows: in the supply chain, to deal with the noncooperation among suppliers and manufacturers on innovative financing schemes, the revenue of manufacturers, the rate of manufacturer loan, and the proper financial risk factor should be relatively high.

Supporting a capital-constrained supplier with mixed pre-shipment financing facilities

This study considers a tandem supply chain (S.C.) in which a credit-worthy retailer cooperates with a capital-constrained supplier to manufacture products. The retailer can use two major pre-shipment financing options, either cash in advance (CIA) or pricing support purchase order financing (PSPOF), to fund the supplier’s operations. A model is developed to examine the interactions among the entities. The retailer can choose the prepayment modality, purchase price and order quantity. The supplier decides on the production input and loan amount. A Karush-Kuhn-Tucker optimality analysis is used to characterise the properties of the retailer’s ordering and financing strategy: (1) The supplier might embezzle the CIA if the purchasing and financing contract is not well-designed; therefore, the retailer should establish some restrictions on the order price and CIA amount. (2) The retailer’s optimal decision about the quantity to purchase is independent of the financing strategy. (3) Because these schemes are interchangeable, multiple optimal financing portfolios consisting of CIA and/or PSPOF are possible. (4) The optimal dual-financing scheme maximises the retailer’s profit and integrates the S.C. Thus, the scheme can eliminate the effect of double-marginalisation. (5) As the supplier becomes more reliable, the retailer should increase the usage of PSPOF and purchasing quantity.

Blockchain Technology Adoption in Supply Chain Finance

Supply Chain Finance (SCF) faces the complex problem of implementing inventory, purchase order and accounts receivable financing automation in terms of transaction data trust and validation. This paper aims to explore how blockchain technology adoption solves the SCF problem using a multi-case method based on the Technological Acceptance Model (TAM). With purposive sampling, 30 cases were selected on the criteria of perceived usefulness and perceived ease of use in solving SCF problems. The results show that trust, validity and distributed ledger transaction data as perceived usefulness are the main drivers of blockchain adoption because it provides solutions to SCF automation problems such as Know Your Customer (KYC), accounting, and transaction settlement. Smart contracts offer easy and fast transactions such as in L/C export processing as perceived ease to use. Of the 30 blockchain projects, 21 offer the usefulness of automated accounts receivable financing, 15 offer easy-to-use purchase order financing and 8 offer easy-to-use inventory financing processes. This study provides the current state of blockchain technology adoption by exploring 30 real application cases in SCF globally. Blockchain advantages provide automation solutions in global supply SCF practices with smart contracts, transparency and security of distributed ledger data feature.

A study on green supply chain under capital constraint considering time-varying salvage value

To reduce environmental pollution and promote sustainable development, more and more suppliers are committed to producing more environmentally friendly products such as green electrical appliances through a green supply chain (GSC) system. However, some suppliers are often limited by a lack of funds in the production and supply process. In this paper, buyer-supported purchase order financing (BPOF) and advance payment discount (APD) are adopted to help the supplier successfully produce green products in a GSC system consisting of a financially constrained supplier and a reputable retailer. Moreover, the salvage values of unsold inventory in most traditional models are fixed, but in real life, the salvage value tends to be time dependent. Therefore, how the time-varying salvage value affects the operation and financing decisions as well as the profit risks is studied. We find that the clearance time of the unsold items affects the optimal order quantity and the supplier's discount rate and the financial institution's optimal interest rate. In addition, the financing equilibrium is BPOF under certain conditions, and the profit risks of the retailer and the entire supply chain are increasing with the order quantity and the clearance time. Finally, our results are verified through numerical analysis.

Optimization of supply chain finance based on Stackelberg model

In recent years, the relationship between the concepts of operations management and finance management has been an attractive area of research among researchers. One of the emerging areas at the beginning of the 21st century in the literature of operations and supply chain management is the topic of supply chain finance (SCF). SCF is a new concept that provides efficient financing of the supply chain, where all parties can balance the working capital and improve cash flow at a reduced cost by utilizing the buyer's or other parties' credit rating. Hence, in this study, an approach to optimize financing based on the Stackelberg model in a three-level supply chain, considering the circumstances in which the supplier is financially constrained for fulfillment the buyer's order and funded by the bank as another member of the supply chain based on the purchase order financing (POF) is discussed. For this purpose, a nonlinear mathematical programming model has been developed to maximize the payoff function of the partners.

Impact of Green Credit Financing and Carbon Emission Limits on the Supply Chain Based on POF

In recent years, environmental protection has been paid more and more attention. Green credit policy (GCP) is one of the significant preferential policies for government to encourage enterprises to vigorously develop green projects. We are interested in the impact of the central bank’s GCP on the profits and optimal strategies of manufacturers and suppliers related to POF (purchase order financing). Specifically, we build a game-theoretical model consisting of a manufacturer, a bank and a green supplier and a non-green supplier. Furthermore, the optimal strategies of the manufacturer and suppliers when the bank or the government sets a carbon emission cap on suppliers are discussed. We come to some important conclusions about a GCP that promotes the development of green projects since it brings higher profits to both the manufacturer and suppliers than the lack of a GCP. Furthermore, the higher the production cost, the better the effect of a GCP. Under the carbon emission restrictions required by the government, the effect of GCP is weakened and the profits of the manufacturer and the suppliers are reduced to zero due to the gradually increasing delivery risks as production costs increase.

Effects of information-processing mechanisms on Internet-based purchase order financing

This paper investigates how small and medium-sized original design manufacturers (SM-ODMs) obtain sufficient purchase order financing (POF) and ultimately improve their financial performance through Internet-based supply chain financial platforms. Based on information-processing theory, this paper explores the impacts of two information-processing mechanisms (formal information integration and informal information exchange) on Internet-based POF loans and financial performance from SM-ODMs’ perspective. The posited relationships are verified through analysis of second-hand project data derived from 207 distinct customer purchase orders and first-hand survey data collected from 33 SM-ODMs, using a structural equation modeling approach. The findings indicate that SM-ODMs can secure larger Internet-based POF loans and improve their financial performance by integrating formal information more extensively. This can be done by exchanging informal information more frequently and proactively at a high level. However, exchanging informal information more frequently and proactively at a low level results in smaller Internet-based POF loans. Finally, SM-ODMs can improve their financial performance through larger Internet-based POF loans. This paper contributes substantially to the literature by shedding light on information-processing mechanisms on Internet-based supply chain financial platforms through the lens of information-processing theory.

Financing Suppliers in the Presence of Demand Risk

Capital constraints are prevalent in supply chains. Since traditional bank financing is often inaccessible, especially for small and medium enterprises, two new alternatives, purchase order financing (POF) and buyer direct financing (BDF), are receiving increasing attention for financing capital-constrained suppliers. We study these two financing schemes under demand risk. We find that, first, surprisingly, POF can always coordinate the supply chain with effectively a wholesale price contract, eliminating the adverse effect of the supplier's financial constraint. BDF can also coordinate the supply chain under certain conditions, but not always. Second, the benefit of supply chain coordination is not distributed evenly. Compared with traditional bank financing, both POF and BDF benefit the buyer but hurt the supplier. Finally, when the buyer has superior information regarding the market demand, the benefit of POF is more pronounced, since POF can perfectly address the information asymmetry while BDF can not. Our research findings thus provide new perspectives on the mechanisms of POF and PDF and also explanations for the increasing popularity of POF.

A Theory of FinTech and Trade Finance

Problem Definition: Smart contract improves the supply chain efficiency by enabling the supplier's commitment to post-shipment financing that mitigates the bank's lending risk exposure and thereby reduces the financing cost. Invoice trading offers better liquidity and faster transaction speed, which allow the supplier to make the post-shipment financing decision upon liquidity shock in contrast to factoring market. This paper investigates how these two types of FinTech adoptions could facilitate the trade finance activities and create value for supply chain firms. Academic/Practical Relevance: As the emerging FinTechs could potentially reshape the trade financing landscape, understanding the impact of FinTech adoption and its interaction with trade finance activities is practically relevant and of great importance. Methodology: We develop a two-stage game-theoretic model and adopt supply chain finance theory to characterize firms' operations and financing strategies in the presence of various FinTech applications. Results: We find that the value of FinTech adoption depends critically on the trade financing structures, including both pre-shipment and post-shipment financing schemes. Under the baseline trade finance model (with purchase order financing and traditional factoring), smart contract leads to win-win outcome for the supplier and the retailer. When buyer direct financing is adopted for pre-shipment financing, smart contract might demotivate the retailer to offer buyer direct financing, which benefits the retailer but significantly hurts the supplier and therefore reduces the supply chain profit. When on-demand invoice trading is adopted for post-shipment financing, the supplier and retailer profit are increased due to its flexibility. However, it completely wipes out the value of smart contract since there exists no commitment issue. Lastly, though supply chain digitalization facilitated by FinTech helps lower the financing cost, it might either hurt the supplier or the retailer. Managerial Implications: Our findings provide guidelines for and insights into when smart contract and invoice trading should be adopted and their interactions with different trade finance schemes. In particular, such FinTechs do not always enhance the supply chain value.

Optimal Financing and Production Decisions for a Supply Chain With Buyer-Backed Purchase Order Financing Contract

Motivated by the practice from Walmart in China, we investigate Buyer-backed Purchase Order Financing (BPOF) contract by considering a supply chain consisting of one capital-constrained supplier and one well-capitalized retailer. The supplier is a small enterprise and cannot get financing from banks independently. In order to get funds for the supplier's production, three parties (the retailer, supplier and bank) reach a BPOF contract. In this contract, the retailer provides credit guarantee for the supplier's loan. As the loan guarantor, the retailer determines the amount of credit guarantee. The bank provides the supplier with the loan as the retailer requests. Then, the supplier gets the loan and determines production quantity. Finally, the market demand is realized and the retailer places order to the supplier. After the supplier delivers products and gets order payment, he can repay the loan. According to BPOF contract, if the order payment is insufficient to repay the loan, the retailer has to compensate the bank for the loss. To identify the optimal decisions for the retailer and supplier, we develop a two-stage Stackelberg game, in which the retailer is leader and the supplier is follower. We find that BPOF contract can help mitigate the supplier's financial distress and improve the retailer's revenue. In addition, we show that how the optimal decisions are affected by the supplier's initial capital and supply chain members' inventory risk. Our study further gives suggestions to supply chain management practices: small suppliers should take advantage of the retailer's high credit for financing, and the retailers who cooperate with small suppliers should maintain a good credit rating.

Credit risk assessment using purchase order information

This paper proposes advanced credit risk assessment and lending operations using purchase order information from borrower firms. Purchase order information from a borrower firm is useful for financial institutions to evaluate the actual business conditions of the firm. This paper shows the application of purchase order information to lending operations and credit risk assessment, and reveals its effectiveness. First, we propose a “purchase order based” credit risk model for real-time credit risk monitoring of firms. Financial institutions can monitor the actual business conditions of borrower firms by evaluating the firm’s asset value using purchase order information. A combination of traditional firm monitoring using financial statements and high-frequency monitoring using purchase order information enables financial institutions to assess the business conditions of borrower firms more precisely and efficiently. Then, with high-frequency data, financial institutions can give borrower firms appropriate support if necessary on a timely basis. Second, we illustrate purchase order financing, which is the lending method backed by purchase order information from borrowers. With purchase order financing, firms that consistently receive purchase orders from credit-worthy firms can borrow money under more favorable lending terms than the usual lending terms based on the financial statements of the borrower firm.

Managing supplier financial distress with advance payment discount and purchase order financing

We examine a capital-constrained supply chain in which a small- and medium-sized enterprise (SME) supplier sells to an established retailer via a wholesale price contract. To mitigate the supplier's financial distress, the retailer chooses between two pre-shipment finance instruments: advance payment discount (APD) and buyer-backed purchase order financing (BPOF). When either APD or BPOF can be chosen, the retailer prefers APD to BPOF if her internal asset level is above a certain threshold. When both APD and BPOF are adopted, the retailer prefers APD and does not initiate BPOF unless the marginal cost of financial distress dominates the benefit of unit discount. We show that the financing equilibrium region of APD increases not only with the retailer's internal capital level, but also with demand variability. The interval and magnitude of the competition penalty incentivizes collaboration between supply chain partners.

Supporting small suppliers through buyer-backed purchase order financing

This paper considers a creditworthy buyer who has two supplies: a low-cost but capital-constrained unreliable SME (small and medium-sized enterprise), and a high-cost but reliable backup source. The buyer may consider a novel financing mechanism named BPOF (buyer-backed purchase order financing) for supporting the SME indirectly. Under the BPOF scheme, the buyer provides partial or full guarantee to share the bank’s financing risk thus facilitate the SME’s loan application. To balance the risk with the benefit due to BPOF, we specify the conditions under which BPOF works and identify the properties of the buyer’s optimal strategy for sourcing and guaranteeing jointly. Generally speaking, a rational buyer’s guarantee should positively correlate to her product margins and the suppliers’ reliability. Finally, we claim when the risk-adjusted wholesale price is sufficiently low, dual financing (BPOF and subsidy) should be suggested.