Supply chain coordination under credit risk with informational effort

Abstract

This paper considers a decentralised supplier–retailer channel, in which providing trade credit to end-customers incurs credit risk. Informational effort can be made to mitigate credit risk but incurs a cost. The retailer makes the optimal credit period and informational effort decisions to maximise his/her profit, which leads to unaligned decisions. Based on the inventory model, this paper focuses on supply chain coordination when credit risk is uncertain and credit-period-dependent. Our results show that informational effort cost-sharing alone cannot achieve channel coordination and that it actually has an adverse effect on supply chain profits. A composite contract (coupling informational effort cost-sharing with credit risk cost-sharing) is proposed to coordinate the channel. In the contract, the profit sharing between both parties depends on the wholesale price (Pareto improvement) for fixed retail prices and purchasing costs. We also provide evidence that the credit period of suppliers is shorter than that of retailer when the supplier shares the retailer’s informational effort cost.

KEYWORDS:

• Channel coordination
• trade credit
• credit risk
• informational effort
• inventory

Data availability statement

We confirm that the data supporting the findings of this study are available within the article.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

This paper is supported in part by the Ministry of Science and Technology, Taiwan under grant MOST 110-2636-E-011-005 and 109-2636-E-011-006.

Notes on contributors

Yu-Chung Tsao

Prof. Yu-Chung Tsao is currently a Chair Professor in the Department of Industrial Management and the Director of Artificial Intelligence for Operations Management Research Center at National Taiwan University of Science and Technology (NTUST). He received the Ph.D. degree from the Institute of Industrial Management at National Central University (NCU). Professor Tsao has received the Ten Outstanding Young Person in Taiwan, the Outstanding Research Award from Ministry of Science and Technology (MOST), the MOST Young Scholar Fellowship, the Dr. Ta-You Wu Memorial Award from MOST, the Mr. Lu Feng-Zhang Memorial Medal from Chinese Management Association (CMA), the Industrial Engineering Medal and the Outstanding Young Industrial Engineer Award from Chinese Institute of Industrial Engineers (CIIE), the Outstanding Young Researcher Investigator Grant from MOST, the Outstanding Research Award and the Young Scholar Award from NTUST, the Outstanding Teaching Award from TTU, etc. His research interests are in the areas of Intelligent decision-making and Analytics, Artificial Intelligence Applications, Supply Chain and Logistics Management, Production and Operations management, Energy System, and Operations-Marketing/Finance/Information Interfaces Management. He has published more than 120 journal papers and 50 conference papers.

Pei-Ling Lee

Pei-Ling Lee is a Postdoctoral Fellow in the Department of Industrial Management and in the Artificial Intelligence for Operations Management Research Center at National Taiwan University of Science and Technology (NTUST). Her research interests are in the areas of Enterprise Resource Planning, Operations Management and Marketing Management.