Financing the capital-constrained supply chain with loss aversion: Supplier finance vs. supplier investment. (October 2019)

• Record Type: Journal Article
• Authors: Yan, Nina; He, Xiuli; Liu, Ye
• Is Part Of: Omega. Volume 88(2019)
• Page Start: 162
• Page End: 178
• Publication Date: 2019-10
• Subjects: Supply chain finance -- Supplier finance -- Supplier investment -- Loss aversion; Management -- Periodicals; 658.4005
• DOI: 10.1016/j.omega.2018.08.003
• Languages: English
• ISSNs: 0305-0483

Abstract

Highlights: We introduce the supplier investment (SI), a widely used financing scheme in practice, into the supply chain management. Our model enables us to drive managerial insights for a supplier and a highly capital-constrained retailer. We examine the impact of retailers loss aversion on firms SCF decisions. Through theoretical and numerical analyses, we show that loss aversion significantly influences the retailers order decision, as well as the suppliers pricing decision. We compare the equilibria in SF and SI, and explore their value to the supplier and the retailer. We also provide managerial insights for the practitioners in SCF. Abstract: This study examines two supply chain financing schemes for the capital-constrained retailer: supplier finance (SF) and supplier investment (SI). SF allows a downstream capital-constrained retailer to pay partially with all the initial working capital, and delays the outstanding balance with a deferred interest rate until the end of the selling season. Under SI, the supplier invests in the capital-constrained retailer's operations as equity and then obtains a portion of dividends in return. Considering the retailer's aversion to loss, we comparatively analyze the retailer's ordering decision and the supplier's pricing decision under these two schemes. We then investigate the value of each scheme and the participation motivations for both parties. We find that loss aversion influences the participants' decisions. When the retailer is loss-averse, she will make more conservative order decisions, and the supplier will set a higher wholesale price. The loss-averse retailer will order more under the SI than under the SF. Also, the lower the retailer's initial working capital, the higher the benefit from pure SF or SI for both supply chain members. In particular, if the retailer is highly capital-constrained, both participants prefer SI to SF. Finally, we explore the financing portfolio of pure SF and SI. Our results show that the supplier can achieve the highest profit when offering the financing portfolio and the retailer may accept this menu.