Sourcing from suppliers with financial constraints and performance risk

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalNot applicablepeer-review

8 Scopus Citations
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Author(s)

  • Christopher S. Tang
  • S. Alex Yang
  • Jing Wu

Related Research Unit(s)

Detail(s)

Original languageEnglish
Pages (from-to)70-84
Journal / PublicationManufacturing and Service Operations Management
Volume20
Issue number1
Early online date11 Oct 2017
StatePublished - 2018

Abstract

Two innovative financing schemes have emerged in recent years to enable suppliers to obtain financing for production. The first, purchase order financing (POF), allows financial institutions to o er loans to suppliers by considering the value of purchase orders issued by reputable buyers. Under the second, which we call buyer direct financing (BDF), manufacturers issue both sourcing contracts and loans directly to suppliers. Both schemes are closely related to the supplier’s performance risk (whether the supplier can deliver the order successfully), upon which the repayment of these loans hinges. To understand the relative e ciency of the two emerging schemes, we analyze a game-theoretical model that captures the interactions among three parties (a manufacturer, a financially constrained supplier who can exert unobservable e ort to improve delivery reliability, and a bank). We find that, when the manufacturer and the bank have symmetric information, POF and BDF yield the same payo s for all parties irrespective of the manufacturer’s control advantage under BDF. The manufacturer, however, has more flexibility under BDF in selecting contract terms. In addition, even when the manufacturer has superior information about the supplier’s operational capability, the manufacturer can e ciently signal her private information via the sourcing contract if the supplier’s asset level is not too low. As such, POF remains an attractive financing option. However, if the supplier is severely financially constrained, the manufacturer’s information advantage makes BDF the preferred financing scheme when contracting with an e cient supplier. In particular, the relative benefit of BDF (over POF) is more pronounced when the supply market contains a larger proportion of ine cient suppliers, when di erences in e ciency between suppliers are greater, or when the manufacturer’s alternative sourcing option is more expensive.

Research Area(s)

  • Buyer direct finance, Operations–finance interface, Purchase order finance, Supply chain finance, Supply risk

Citation Format(s)

Sourcing from suppliers with financial constraints and performance risk. / Tang, Christopher S.; Alex Yang, S.; Wu, Jing.

In: Manufacturing and Service Operations Management, Vol. 20, No. 1, 2018, p. 70-84.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalNot applicablepeer-review