Credit Insurance In A Capital-constrained Supply Chain

With the continuous development of economy and the increasingly fierce market competition,small and medium-sized enterprises(SMEs)face more and more difficul-ties in the development process.At present,one of the biggest problems for SMEs is the shortage of funds.Due to the high operational risks and poor credit ratings,many SMEs often fail to obtain financing from banks and other financial institutions.Under this circumstance,for the sake of the survival and development of enterprises,many SMEs adopt trade credit.However,due to the demand uncertainty,the financier of trade credit may break trade credit contract,which causes a amount of capital loss to the provider of trade credit.In order to alleviate the potential risk of capital loss,credit insurance as an important risk management tool,is widely used in commercial trade.Under such a realistic background,how to better apply credit insurance to solve the risk.of capital loss caused by trade credit is not only an urgent problem for many SMEs,but also a deep concern for scholars in supply chain finance field.Therefore,the solution of this problem provides great value to corporate practice and theoretical research.This paper takes credit insurance as the research object,considers a three-level supply chain composed of a capital-constrained retailer,a well-funded manufacturer and an insurer,and explores how the manufacturer should avoid the retailer’s default risk through credit insurance.The research conclusions of this paper can provide certain theoretical guidance for the operation and management decisions of enterprises,and also effectively enrich the risk management research in supply chain finance.The main research contents and conclusions of this paper are as follows:(1)The application conditions and roles of credit insurance and the insuring mech-anism of the retailer and the manufacturer are studied.First,it analyzes the operational decisions of the supply chain and its participants in the supply chain with and without credit insurance.Then,by comparing these two situations,it derives the application conditions and roles of credit insurance and the insuring mechanism of the retailer and the manufacturer.Next,it discusses the impact of changes in the leadership of supply chain participants on the application conditions and roles of credit insurance.The re-sults show that when the manufacturer’s risk aversion is high,the manufacturer prefers to purchase credit insurance alone.Although the retailer wants to buy credit insurance with the manufacturer to obtain higher profit,this strategy will be prevented by the manufacturer as it harms the manufacturer’s benefit.The application of credit insur-ance promotes the capital-constrained retailer to obtain the cheaper financing and the higher trade credit amounts,and boosts the retailer’s order quantity and all supply chain participants’ profits.In addition,the application of credit insurance improves the sup-ply chain efficiency and achieves partial coordination of the supply chain,but it cannot achieve complete coordination of the supply chain.Compared with the situation where the insurer is the leader of the two-level Stackelberg game,in the situation where the manufacturer is the leader,credit insurance is more likely to be applied in commercial trade.(2)The problem of the manufacturer’s optimal insurance coverage is studied.It first discusses the retailer’s order quantity decision and the manufacturer’s wholesale price decision in the supply chain without credit insurance.Next,it analyzes the re-tailer’s order quantity decision,the manufacturer’s wholesale price decision and insur-ance coverage decision,and the insurer’s premium rate decision in the supply chain with credit insurance.Then,it separately studies the application conditions and roles of credit insurance in the case of considering and not considering the insurer’s decision.The re-sults show that when the manufacturer’s risk aversion is high or the capital-constrained retailer’s initial capital is low,the manufacturer will purchase credit insurance,which promotes the manufacturer to obtain higher utility.In addition,the application of credit insurance encourages the retailer to obtain higher order quantity and richer profit.How-ever,the application of credit insurance increases the retailer’s bankruptcy risk,which increases the whole supply chain’s operational risk.Compared with the case where the decision of the insurer is not considered,the possibility of credit insurance being applied decreases when the decision of the insurer is considered.(3)The influence of competition between two retailers on the application condi-tions and roles of credit insurance is studied.It first separately analyzes the operation decisions of supply chain participants in the supply chain with and without credit in-surance.Next,it compares these two situations to get the application conditions and roles of credit insurance.In addition,it compares the two competing retailers scenario with the one retailer scenario,and analyzes the influence of retailers’ competition on the application conditions and roles of credit insurance.The results show that when the manufacturer’s risk aversion is high or the weaker retailer’s initial capital is low,the manufacturer will purchase credit insurance,which promotes the manufacturer to obtain higher product sales and utility.However,unlike the result that the capital-constrained retailer always benefits from the purchase of credit insurance by the manufacturer in the one retailer scenario,the application of credit insurance is not always beneficial to the weak retailer with capital constraints in the two retailers scenario.In addition,the appli-cation of credit insurance may also harm the order quantity and profit of the dominant retailer.The main contributions of this paper are:introducing credit insurance into the capital-constrained supply chain,discussing the impact of credit insurance on the oper-ational decisions of supply chain participants;studying the application conditions and roles of credit insurance,as well as the insuring mechanism between the retailer and the manufacturer and the insurance coverage;analyzing the impact of competition be-tween retailers on the application conditions and roles of credit insurance.This paper effectively enriches the research in supply chain finance.