Supply chain finance: The role of credit rating and retailer effort on optimal contracts

Abstract

Supply chain finance aims at finding the best financing arrangements within a given buyer-supplier dyad. The source of capital can be internal (buyer or supplier) or external (financial institution) to the supply chain. So far, many studies have investigated the optimal mix of the sources of capital; our study aims at contributing to the recent literature that explores the interface of operations and finance extending the supplier-based financing models. As the Covid-19 pandemic hits economic activity, the financial constraints have ever greater importance; knock-on effects of the Covid-19 crisis urges on the critical role of a supply chain that should provide financial resources, along to the flow of goods, in the more efficient way. The proposed model considers a supply chain formed by a supplier and a retailer, both capital-constrained that can ask for a loan to a financial institution or resort on their internal reciprocal sources. Demand is uncertain, retailer, that acts as a price taker, may also affect her product demand applying some effort in increasing sales. Both retailer and supplier can fail. The model optimizes the supplier and retailer's’ profit varying their contract parameters; doing this, the research allows to understand the interplay between supply chain operational and financial issues when retailer's sales effort is at work, and its findings can support retailer in the suppliers selection basing on their credit rating. Our findings show how operational (retailer's effort) and financial (trade credit conditions) issues can synergically interact also in supply chain with low working capital or conversely how retailer with high working capital can perform better working with low rating supplier, however boosting the chance to successfully compete in the Covid-19 pandemic era.