Determination of the optimal trade credit policy: a supplier-Stackelberg model

• Published in: The Journal of the Operational Research Society Vol. 64; no. 7; pp. 1030 - 1048
• Main Authors: Zhou, Y-W, Zhou, D
• Format: Journal Article
• Language: English
• Published: London Taylor & Francis 01.07.2013; Palgrave Macmillan; Palgrave Macmillan UK; Taylor & Francis Ltd
• Subjects: Business and Management; Cost control; Credit policy; Discounted cash flow; Discounts; Economic models; EOQ; General Paper; General Papers; Inventories; Inventory; Literature reviews; Management; Operating costs; Operations research; Operations Research/Decision Theory; Opportunity costs; Order quantity; Payments; Retail stores; Retail trade; Studies; supplier-Stackelberg setting; Suppliers; supply chain; Supply chains; Total costs; Trade credit; supplier-Stackelberg setting; supply chain; trade credit; EOQ
• ISSN: 0160-5682; 1476-9360
• DOI: 10.1057/jors.2012.102

This paper considers a two-echelon supply chain, where one supplier sells through a retailer a product with a stable market demand. We focus on how the supplier induces the retailer through trade credit to order more to reduce his/her own inventory-related cost. Under a 'supplier-Stackelberg' setting, we provide the supplier with the method of determining two trade credit scenarios: unconditional and conditional trade credit. We show that the unconditional trade credit scenario is always beneficial to the retailer but harmful to the supplier in most situations, while the conditional trade credit scenario is always beneficial to both parties. In addition, we specify the conditions under which the provision of unconditional trade credit is beneficial to the supplier. The three insights obtained in this paper are the following: (i) When the retailer's per-unit opportunity cost is less than his/her per-unit opportunity gain, unconditional trade credit can induce the retailer to order less instead of more. (ii) If the supplier offers the retailer unconditional trade credit, the length of trade credit offered will have an upper bound. (iii) A well-designed conditional trade credit policy can realize a win-win outcome but also enables the supplier to occupy all the savings in the channel's cost incurred by trade credit, but any unconditional trade credit policy does not.