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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 differential 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 credi...