Managing corporate financial risks with finance instruments in supply chains

Abstract

Due to the high research and development investment and high production costs, many upstream suppliers are often constrained by limited initial capital when producing and supplying products, with some suppliers struggling to get funding from banks because they lack guarantees and credit histories. To solve this problem, Supply Chain Management (SCM) practitioners and scholars are paying attention to Supply Chain Finance (SCF), which can help cash-strapped suppliers obtain funds through supply chain cooperation. In the current situation, pre-shipment financing is worth studying, and is based on purchase orders rather than invoices, and credit risk is relatively highly based on trust between buyers and sellers. Therefore, how to effectively use pre-shipment financing tools to tackle the problem of the working capital constraints of suppliers in supply chains and manage the financial risks of corporates has become an important research topic. Salvage value is the amount received for the disposal of unsold inventory at the end of the selling season. For perishable products with salvage value, due to the uncertainty of market demand and the existence of many invisible factors, downstream retailers may purchase more goods from suppliers than market demand before the selling season, thus facing the problem of excess inventory after the season. However, in many previous SCF studies, to simplify the calculation, the salvage value was ignored or set to zero in short-term financing. Therefore, it is important to study the influence of different salvage values on supply chain operation and financing decisions. The existing research on SCF is rarely applied to specific industries. Scholars should consider the application of SCF in various industries, such as high-tech industries. In addition, when previous studies focused on Green Supply Chain (GSC) and environmental sustainability, they mainly discussed how enterprises make optimal decisions according to different carbon sources, policies, and carbon emission costs. However, few studies have considered the combination of GSC and SCF to help the supplier solve the problem of capital constraints, so as to produce more green products that are more environmentally friendly, which is worth studying. Therefore, the thesis studies the impact of various salvage values on the operation and financing decisions of participants under different financing instruments in capital-constrained supply chains, filling in the research gaps above. The main contributions are as follows: 1. The supplier can be funded by pre-shipment financing instruments. Advance Payment Discounted (APD) financing, also a form of cash in advance with a discount, to alleviate the financial stress before product delivery. Furthermore, Buyer-Backed Purchase Order Financing (BPOF) is also a pre-shipment financing tool to deal with this problem where a financial institution provides loans according to a reliable buyer purchase order before product delivery. Two other financing mechanisms, Buyback Support Buyer-Backed Purchase Order Financing (BSBPOF) and Buyback Support Advance Payment Discount (BSAPD) are also considered to ease the supplier's financial pressures, which indicate that the supplier promises to buy back unsold products after the normal sale season. 2. This research focuses on considering various salvage values (e.g., positive and negative salvage values, supplier-responsible salvage values, time-varying salvage values) when using SCF to solve the supplier funding constraints. First, whether positive and negative salvage influence operation and financing decisions under APD and BPOF are examined. Further, the influence of the difference between the buyback price and salvage value under BSBPOF and BSAPD on the participants' decisions and the financing equilibrium is studied. This study also studies how time-varying salvage values influence the decisions under APD and BPOF and uses mean-variance theory to study the profit risk of the supply chain. 3. This research considers the application of SCF in the mobile phone and TV industries to solve the financing difficulties of the suppliers. In particular, to reduce environmental pollution and promote sustainable development, the supplier can be committed to producing more eco-friendly televisions through a GSC system. To sum up, the analytical modeling approach is adopted with the integration of numerical study for the observations from industrial practice in various industries. This thesis begins with a comprehensive literature review on SCM, SCF, capital constraint issues for managing the buyers and the suppliers, perishable goods with salvage values, and the application of various financing instruments. Then the mathematical models are used to analyze the problems. Finally, in-depth numerical studies are conducted to verify the research results. The management insights generated in this study are of benefit to the suppliers, the retailers, the financial institutions, and the whole industrial spectrum.