TY - JOUR
T1 - Sourcing from suppliers with financial constraints and performance risk
AU - Tang, Christopher S.
AU - Alex Yang, S.
AU - Wu, Jing
PY - 2018
Y1 - 2018
N2 - 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.
AB - 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.
KW - Buyer direct finance
KW - Operations–finance interface
KW - Purchase order finance
KW - Supply chain finance
KW - Supply risk
UR - http://www.scopus.com/inward/record.url?scp=85043343900&partnerID=8YFLogxK
UR - https://www.scopus.com/record/pubmetrics.uri?eid=2-s2.0-85043343900&origin=recordpage
U2 - 10.1287/msom.2017.0638
DO - 10.1287/msom.2017.0638
M3 - RGC 21 - Publication in refereed journal
SN - 1523-4614
VL - 20
SP - 70
EP - 84
JO - Manufacturing and Service Operations Management
JF - Manufacturing and Service Operations Management
IS - 1
ER -