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Material and Cash Flow in Two-Tier Supply Chain with Trade Credits and Defaults

Author

Listed:
  • Chou, Mabel C.
  • Teo, Chung-Piaw
  • Zhong, Yuan-Guang

Abstract

We develop a supply chain finance and inventory model to understand how trade credit terms affect a firm’s financing costs and inventory decision along the supply chain. In particular, we study the following question: how should a warehouse (or distributor) receiving trade credits from an external supplier share and extend the trade credit terms to her customers (i.e. retailers)? How does this financial flow affect the replenishment decisions (i.e. material flow) in the system? We use the classical echelon inventory approach to synthesize the effects of trade credits in a one-warehouse-multi-retailer system. Payment default from retailers are considered and trade credit limit is used as a risk management tool. Interestingly, we show that longer credit terms from the external supplier may not necessarily translates into longer credit terms for the retailers in some supply chain environments.

Suggested Citation

  • Chou, Mabel C. & Teo, Chung-Piaw & Zhong, Yuan-Guang, 2019. "Material and Cash Flow in Two-Tier Supply Chain with Trade Credits and Defaults," Foundations and Trends(R) in Technology, Information and Operations Management, now publishers, vol. 12(2-3), pages 119-134, March.
    • Handle: RePEc:now:fnttom:0200000081
    DOI: 10.1561/0200000081
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    References listed on IDEAS

    as
    1. Mahesh Nagarajan & Yehuda Bassok, 2008. "A Bargaining Framework in Supply Chains: The Assembly Problem," Management Science, INFORMS, vol. 54(8), pages 1482-1496, August.
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    3. Terry A. Taylor & Erica L. Plambeck, 2007. "Simple Relational Contracts to Motivate Capacity Investment: Price Only vs. Price and Quantity," Manufacturing & Service Operations Management, INFORMS, vol. 9(1), pages 94-113, January.
    4. Helper, Susan, 1991. "Strategy and Irreversibility in Supplier Relations: The Case of the U.S. Automobile Industry," Business History Review, Cambridge University Press, vol. 65(4), pages 781-824, January.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Risk management; Hedging; Operational risk; Supply chain finance;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M11 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Production Management

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