Financing the newsvendor with vendor credit line

Vendor credit line ( VCL ) is a common instrument to fund retailers with capital constraints, wherein a supplier extends credit for a retailer’s purchases and limits credit size for the sake of default risk. Our study investigates the operational and financial decisions in a supply chain consisting of a supplier and a capital-constrained retailer, wherein the supplier sets credit limits for the retailer’s ordering, and then examines the financing choice between VCL and bank loan. We derive the equilibrium credit limits, order quantity and financing mode and conclude that, the credit limits linearly increase with the capital level, and both credit limits and capital level are decisive to the order quantity and financing mode. In the illustrating examples, we identify the decision regions contingent on critical fractiles under different demand distributions (e.g., normal, uniform and exponential) and find the financing choice hinging on the supplier’s profit margin if the capital level stays low, otherwise VCL dominates. Finally, sensitivity analysis on key parameters is employed, suggesting that VCL is more preferable as the wholesale price increases or as the retail price and production cost decreases.