Inventory financing a risk-averse newsvendor with strategic default
Industrial Management & Data Systems
ISSN: 0263-5577
Article publication date: 16 April 2020
Issue publication date: 4 May 2020
Abstract
Purpose
The paper aims to explore the optimal strategies of inventory financing when the risk-averse retailer has different objectives, in the presence of multi-risk, i.e. demand risk, non-operational risk and retailer's strategic default risk.
Design/methodology/approach
This paper develops an inventory financing model consisting of a bank and a risk-averse retailer with strategic default. This paper considers two scenarios, i.e. the capital-constrained retailer cares about its profit or firm value. In the first scenario, the bank acts as a Stackelberg leader determining its interest rate, and the retailer acts as a follower determining its pledged quantity. In the second one, the bank capital market is perfectly competitive. Lagrange multiplier method is adopted to solve the optimization.
Findings
The optimal strategies in inventory financing scheme in two scenarios are derived. Only when the initial stock is relatively high, the retailer pledges part of the initial stock. Retailer's risk aversion reduces its pledged quantity and performance. The strategic default reduces its profit. When it is relatively high, the bank refuses to offer the loan.
Practical implications
Analytical inventory and financing strategies are specified to help retailers and banks to better understand the interaction of finance and operations management and to better respond to multi-risk.
Originality/value
New results and managerial insights are derived by incorporating partially endogenous strategic default and risk aversion into inventory financing, which enriches the interfaces of operations management and finance.
Keywords
Acknowledgements
This work was supported by the National Natural Science Foundation of China [grant number 71901010] and the China Postdoctoral Science Foundation [grant number 2018M641157].
Citation
Li, T., Fang, W., Dash Wu, D. and Zhang, B. (2020), "Inventory financing a risk-averse newsvendor with strategic default", Industrial Management & Data Systems, Vol. 120 No. 5, pp. 1003-1038. https://doi.org/10.1108/IMDS-08-2019-0417
Publisher
:Emerald Publishing Limited
Copyright © 2020, Emerald Publishing Limited