Impact of Interest Rate Risk on Supply Chain Network under Bank Credit and Trade Credit Financing

Abstract

The purpose of this study is to propose a methodology that reflects the impact of interest rate risk on firms in supply chain network under bank financing and trade credit and further describe how trade credit improves the impact of interest rate risk on supply chain network through a financial flow equilibrium. A mean-variance framework and a network equilibrium analysis are integrated to provide a modeling framework. The model allows for the investigation of how bank credit financing (BCF) and trade credit financing (TCF) affect the payment strategy and financial flow of interconnected firms in supply chain networks and how they are affected by interest rate risks. The optimal behavior of manufacturers and retailers is described through variational inequality. We construct a supply chain network equilibrium model and derive qualitative properties of the solution and the function that becomes assimilated to the variational inequality problem. Additionally, variational inequality is solved using the modified projection method. This study extends the research on the impact of interest rate risk on the decision in supply chain network of firms. While other studies focus on the game between banks and firms, only a few authors have made attempts to examine the game between one manufacturer and one retailer in supply chain. An effective trade credit strategy is obtained by balancing cash and credit transactions. Through the case study, we learn how to balance the capital flow effectively to improve the negative impact of interest rate risk on supply chain.