Foundations and Trends® in Technology, Information and Operations Management > Vol 10 > Issue 3-4

Agency Cost of Debt: A Case for Supplier Financing

Jiri Chod, Boston College, USA, chodj@bc.edu
 
Suggested Citation
Jiri Chod (2017), "Agency Cost of Debt: A Case for Supplier Financing", Foundations and Trends® in Technology, Information and Operations Management: Vol. 10: No. 3-4, pp 220-236. http://dx.doi.org/10.1561/0200000061

Published: 21 Dec 2017
© 2017 J. Chod
 
Subjects
 
Keywords
G20 Financial ServicesG32 Financial Risk and Risk ManagementM11 Production management
Supplier financingSupply chain financeCost of capital
 

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In this article:
1. Motivation and Description of the Problem
2. Modeling Approach and Methodology
3. Results and Insights
4. Further Research
References

Abstract

In this paper, we first show how debt financing distorts the inventory decision of a multi–product retail firm. Protected by limited liability, a debt–financed retailer seeks risk by favoring items with a low salvage value, those with a high profit margin, and those that represent a large share of the total inventory investment. Second, we demonstrate that in many cases, this distortion can be avoided by using supplier financing. A supplier who automatically observes the retailer’s order quantities, can deter risk–seeking behavior on the part of the retailer with the threat of stricter credit terms. This provides suppliers with a financing advantage over banks, which can monitor inventory only at a cost.

DOI:10.1561/0200000061
ISBN: 978-1-68083-376-8
272 pp. $99.00
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ISBN: 978-1-68083-377-5
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Table of contents:
Supply Chain Finance: Overview and Future Directions
Part 1: Supplier Financing
Agency Cost of Debt: A Case for Supplier Financing
Trade credit as an option to acquire financing
Impact of Trade Credit Financing on Firm Performance in Supply Chains
Part 2: Buyer Financing
Reverse factoring: A theory on the value of payment terms extension
Improving Channel Efficiency through Financial Guarantees by Large Supply Chain Participants
Purchase Order Finance: A Conceptual Model with Economic Insights
Part 3: Inventory Models and Financing Considerations
Managing Inventory for a Multidivisional Firm with Cash Pooling
On the Cost of Capital in Inventory Models
Part 4: Operational Investments and Financing Issues
Debt Financing and Supply Chain Capacity Investment
Production, Capacity, and Liquidity of a Self-Financed Firm
Supply Chain Debt Financing in Competition
References
Crowdfunding via Revenue-Sharing Contracts

Supply Chain Finance

Supply Chain Finance focuses is on creating liquidity in the supply chain through various Buyer or Seller-led solutions with or without a facilitating technology. The role of supply chain finance (SCF) is to optimize both the availability and cost of capital within a given buyer-supplier supply chain. To add further value, information on the physical flow of goods can be monitored. The coupling of information enables lenders to mitigate financial risk within the supply chain. The mitigation of risk allows more capital to be raised, capital to be accessed sooner, or capital to be raised at lower rates. Supply chain participants reside in diverse economic environments, are of different sizes, face a variety of uncertainties, have different bargaining powers over its trading partners, and have different accessibilities to capital markets. Many forms of financing arrangements between buyers and suppliers have emerged intending to overcome challenges in their specific economic and business environments.

Part 1 examines Supplier Financing. The three papers included in this section discuss supplier based financing issues including: motivation and rationale for supplier based financing, the optimal mix of bank financing and supplier financing, and empirical study of the impact of trade credit on firm performance. Part 2 focuses on Buyer Financing including three papers included that discuss buyer based financing issues in supply chains including the rationales of different types of buyer based financing arrangements and their impacts on supply chain performance. Part 3 reviews Inventory Models and Financing Consideration and the two papers in this part of the book explore how to coordinate the management of the cash flow and inventory flow within an organization and the relationship between a firm’s inventory policy and its cost of capital. Part 4 examines Operational Investments and Financing Issues and includes four papers that address operational investments with explicit financing considerations.

 
TOM-061

Companion

Foundations and Trends® in Technology, Information and Operations Management, Volume 10, Issue 3-4 Special Issue: Supply Chain Finance
See the other articles that are also part of this special issue.