Pre-shipment Financing: Credit Capacities and Supply Chain Consequences

Abstract

We study a supply chain where a wealthy retailer buys from a debt-constrained supplier who cannot internally finance his entire production operations. The retailer commits to a minimum purchase quantity to facilitate pre-shipment financing, which enables the supplier to extend his debt capacity and thereby also his production level. Thus, our work fits with the recently developing literature stream on the operations-finance-interface. Moreover, while pre- and post-shipment financing solutions have attracted increased attention in the industry during the recent economic crisis, this paper is the first contribution to analyze the potential of pre-shipment financing jointly considering operational and financial constraints.

Key parameters of our model are the retailer's creditworthiness, which determines the extent to which the commitment will relax the supplier's financial constraint, the supplier's independent financial resources, and the demand characteristics of the product market. Using a newsvendor model of operations, we analyze the strategic interaction of the two players as a Stackelberg game. In equilibrium, we illustrate that the retailer's profits are increasing in her own creditworthiness and in her supplier's debt capacity. Hence, she has an interest to collaborate with a financially strong supplier. In contrast, we find that the supplier may be at a disadvantage when doing business with a highly creditworthy retailer, since the latter may reduce her purchase order commitment and extract profit from the supplier. We highlight numerically that the supplier's debt capacity and the retailer's creditworthiness are generally substitutes for the retailer but are complements for the supplier in medium value ranges.

About the Presenter

Anne Lange is currently a postdoctoral researcher at the Department of Business Policy and Logistics at the University of Cologne. Her research interests include Supply Chain Finance and Transportation Networks.
Anne Lange graduated as Dr. rer. pol. (PhD) from the University of Cologne in December 2010 with her thesis “Centrality in Strategic Transportation Network Design”. Her PhD research was supported by a scholarship by the Klaus Murmann Fellowship Program, Foundation of German Business. She subsequently pursued her research as a PostDoc in the OPAC group at TU Eindhoven, working for a research project on Supply Chain Finance. Anne returned to the University of Cologne in April 2013.

More about Dr.  Anne Lange

About the Seminar

The KLU research seminar series is a regular meeting of PhD students, Post-Docs and professors who conduct research in the field of logistics and supply chain management. The research seminar is open to the public and we happily welcome guests.