Managing Supplier Financial Risk with Pre-shipment Finance Instruments

Abstract

In this chapter, we present a stylized model for managing supplier financial distress risk by two pre-shipment finance instruments: advance payment discount (APD) and buyer-backed purchase order finance (BPOF). We analyze the mechanisms of APD and BPOF, respectively. Next, we characterize the equilibria between APD and BPOF in both single-financing and dual-financing schemes. Moreover, we show numerically the effects of demand variability and the retailer’s internal capital level on the financing equilibrium and supply chain efficiency. We conclude with a brief summary and directions for future research.