Managing supplier financial distress with advance payment discount and purchase order financing. (October 2019)

• Record Type: Journal Article
• Authors: Zhao, Lima; Huchzermeier, Arnd
• Is Part Of: Omega. Volume 88(2019)
• Page Start: 77
• Page End: 90
• Publication Date: 2019-10
• Subjects: Supply chain finance -- Capital constraint -- Advance payment discount -- Purchase order financing; Management -- Periodicals; 658.4005
• DOI: 10.1016/j.omega.2018.10.019
• Languages: English
• ISSNs: 0305-0483

Abstract

Highlights: We examine advance payment discount and buyer-backed purchase order financing. Financing equilibrium between both pre-shipment finance instruments is explored. The retailer prefers to employ advance payment discount under certain conditions. Equilibrium region of advance payment discount increases in demand variability. Incentive alignment in supply chain is crucial for reducing competition penalty cost. Abstract: 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.