Supply chain optimal ordering policy under two-level trade credit with default risk

The paper assumes that the manufacturer offers the wholesaler trade credit, and the wholesaler provides the retailer with trade credit in a three-echelon supply chain. First, we formulate the mathematical models that include the time value of capital and the partial default risk for the three members, respectively. Second, we derive the existence and uniqueness conditions of the optimal lot-size or production quantity for the members under decentralised replenishment policy. Finally, we present the sensitivity analysis of the optimal solution with respect to the parameters to provide managerial insights. The results show that the larger standard deviation of the demand, the more effective trade credit as the settlement method. The key contribution of the paper is that we present an ordering model that optimises lot sizes with two-level trade credit and investigate the transmission effect of default credit risk in a three-echelon supply chain under an uncertain market environment. [Submitted: 23 September 2020; Accepted: 8 April 2021]