Improving Channel Efficiency through Financial Guarantees by Large Supply Chain Participants

In supply chains where there is a smaller channel partner with tight budget constraints, flow of materials, products and cash through the channel can suffer significantly, and as a result, all supply chain participants can be hurt. In order to remedy this problem, in recent years, some larger companies have been implementing innovative contracting solutions aimed to ease the financial frictions in the supply chain. In this paper, we present several examples of emerging solutions employed in practice, which involve larger firms providing guarantees in various forms to reduce financing costs for smaller partners, and discuss some recent results from the literature studying these solutions. The main example we discuss is Buyer Intermediated Financing, studied in Tunca and Zhu (2017), where a large buyer can significantly reduce its suppliers’ financing costs by guaranteeing the repayment of suppliers’ loans. We discuss the insights from our study on why and how such a scheme can reduce wholesale prices, increase order fill rates, and create a win-win for suppliers and retailers. In addition, we discuss future research directions on financial guarantees by large supply chain partners based on newly emerging practices.