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A supportive pricing model for suppliers with purchase order financing

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  • Andy Wu

Abstract

Traditionally, lowering the purchase price is welcomed by a business buyer since people believe it can reduce the costs. However, it can be another story if her supplier is short of money and applies for purchase order financing to fund the production. This paper identifies the conditions under which a buyer has the motivation of allowing higher purchase price to facilitate the supplier’s loan application and consequently improve the supply availability. We use a Stackelberg model to describe the interaction between the supplier’s plan (deciding the loan amount and production input simultaneously) and the buyer’s order design (deciding the purchase price and order size jointly). We show the buyer’s optimal order design has four kinds of closed-form solutions as the supplier’s operational state follows a two-point distribution. The design choice should depend on the item value and the supplier’s reliability. In short, this research shows when to increase the purchase price and how to coordinate the order size with it. Generally speaking, if the item value is high and the supplier’s reliability is medium, a buyer allowing a premium price can ensure the supply and actually maximise her expected profit.

Suggested Citation

  • Andy Wu, 2017. "A supportive pricing model for suppliers with purchase order financing," International Journal of Production Research, Taylor & Francis Journals, vol. 55(19), pages 5632-5646, October.
    • Handle: RePEc:taf:tprsxx:v:55:y:2017:i:19:p:5632-5646
    DOI: 10.1080/00207543.2017.1327727
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    References listed on IDEAS

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    1. Hartmut Stadtler, 2015. "Supply Chain Management: An Overview," Springer Texts in Business and Economics, in: Hartmut Stadtler & Christoph Kilger & Herbert Meyr (ed.), Supply Chain Management and Advanced Planning, edition 5, chapter 1, pages 3-28, Springer.
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    Cited by:

    1. Zhao, Lima & Huchzermeier, Arnd, 2019. "Managing supplier financial distress with advance payment discount and purchase order financing," Omega, Elsevier, vol. 88(C), pages 77-90.
    2. Song-Man Wu & Felix T. S. Chan & S. H. Chung, 2022. "The influence of positive and negative salvage values on supply chain financing strategies," Annals of Operations Research, Springer, vol. 315(1), pages 535-563, August.
    3. Wu, Yang & Wang, Ziyang & Yao, Jianming & Guo, Haixiang, 2023. "Joint decision of order allocation and lending in the multi-supplier scenario purchase order financing," International Journal of Production Economics, Elsevier, vol. 255(C).
    4. Wu, Song-Man & Chan, Felix T.S. & Chung, S.H., 2022. "The impact of buyback support on financing strategies for a capital-constrained supplier," International Journal of Production Economics, Elsevier, vol. 248(C).
    5. Huang, Qiuping & Zhao, Xiande & Yeung, KwanHo & Ma, Lijun & Yeung, Jeff Hoi-yan, 2021. "Effects of information-processing mechanisms on Internet-based purchase order financing," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 146(C).
    6. Sung, Hao-Chang & Ho, Shirley J., 2020. "Supply chain finance and impacts of consumers’ sustainability awareness," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).

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