Material and Cash Flow in Two-Tier Supply Chain with Trade Credits and Defaults Available to Purchase

We develop a supply chain finance and inventory model to understand how trade credit terms affect a firm’s financing costs and inventory decision along the supply chain. In particular, we study the following question: how should a warehouse (or distributor) receiving trade credits from an external supplier share and extend the trade credit terms to her customers (i.e. retailers)? How does this financial flow affect the replenishment decisions (i.e. material flow) in the system? We use the classical echelon inventory approach to synthesize the effects of trade credits in a one-warehouse-multi-retailer system. Payment default from retailers are considered and trade credit limit is used as a risk management tool. Interestingly, we show that longer credit terms from the external supplier may not necessarily translates into longer credit terms for the retailers in some supply chain environments.