Who should finance the supply chain? Impact of credit ratings on supply chain decisions

Problem description: We study the impact of credit ratings on operational and financial decisions of a supply chain with a supplier and a retailer interacting via an early payment discount contract. The retailer has a single opportunity to order a product from the supplier to satisfy future uncertain demand. Both the retailer and supplier are capital constrained, and the retailer can use both short-term bank loans and trade credits for his financing needs, while the supplier can use short-term bank loans and/or the retailers early payment. We analyze for all relevant operational decisions (wholesale price, trade credit rates, bank loans, and order quantity) for capital-constrained firms. Academic/practical relevance: We add a framework on who should finance inventories, and at what rates, in the presence of di erential credit ratings of the supply chain parties. Methodology: Within a modified selling to the newsvendor Stackelberg game with the supplier as the leader, we derive the equilibrium trade credit rates, wholesale price, bank loans, and order quantity. Results: We show there exists a threshold such that if the supplier’s credit rating is above it, then the supplier o ers trade credits with zero interest rate and the retailer uses trade credits only. Otherwise, the supplier sets a positive rate, which motivates the retailer to combine trade credits and bank loans. The supplier always benefits from working with good rating retailers. A retailer prefers to work with suppliers outside the supplier’s credit rating hole (a finite set of ratings) over suppliers with ratings within the range. Managerial implications: We provide insights on who should finance supply chain inventories and at what rates when there are di erential credit rating between the supplier and retailer. We provide a plausible explanation for the practice of large and good credit rating retailers maintaining a small cash ratio and working with small suppliers in developing countries.