chain. A research question naturally arises: How would a 3PL firm
with ILFS impact the supply chain with a budget-constrained retailer?
To this end, we investigate two different roles of a 3PL firm in an
extended supply chain with a supplier, a retailer, a 3PL firm, and
a bank. The retailer is budget-constrained and may borrow capital
from either the bank or the 3PL firm. The first role is called the traditional
role, where the 3PL firm provides only the traditional logistics
services in the supply chain when the retailer borrows capital
from the bank. The second role is referred to as the control role,
where the 3PL firm provides both logistics services and trade credit
financing to the budget-constrained retailer.
Our analysis indicates that, in the traditional role model with
symmetric budget information, the retailer’s optimal order quantity
is less than that in a classic newsvendor without budget constraint
model. This is because the retailer bears additional
financial burden compared with the classic newsvendor. As a result,
overall supply chain efficiency is undercut because of an
insufficient budget. This inefficiency can be altered in the control
role model, where the 3PL firm integrates logistics and financial
services and, thus, can better coordinate the supply chain by providing
a lower interest rate. Moreover, the alliance of logistics
and financing enables automatic monitoring of the transactions
of products, thus preventing the retailer’s potential concealment
of budget information.
We further compare the performance of the above two roles in
terms of interest-demand elasticity, which measures the responsiveness
of the retailer’s order quantity to the change in the interest
rate. In both roles, if the order quantity is interest inelastic (i.e.,
interest-demand elasticity is low), the lender, either the bank or
the 3PL firm, would charge the interest rate at its highest level;
in doing so, the lender can maximally squeeze profit from the retailer.
In the opposite extreme case where the order quantity is highly
interest elastic (i.e., interest-demand elasticity is high), the lender
would reduce the interest rate to its lowest level to encourage a
bigger order. Thus, there is no difference among different models
if interest-demand elasticity is too high or too low. Given that normally
interest-demand elasticity is in the medium range, the lender
in the control role model yields a lower interest rate than the
traditional role model; thus, the retailer’s order quantity is higher
in the control role model. This would, in turn, benefit the supplier,
the retailer, the 3PL firm, and the entire supply chain. These results
provide theoretical support to current ILFS practices.
We extend our analysis to a supplier credit model where the
supplier provides trade credit to the budget-constrained retailer.
We find the control role model outperforms the supplier credit
model for the players in terms of their profits, if the 3PL firm’s marginal
profit in the control role model is higher than the supplier’s
marginal profit in the supplier credit model, or vice versa. This is
because a higher marginal profit renders a cushion for the lender
to charge a lower interest rate, which, in turn, results in a bigger
order from the retailer and then boosts overall supply chain effi-
ciency. This result demonstrates that the control role can be quite
attractive if the supply market is very competitive, such that the
supplier’s marginal profit is relatively lower. In both the control
role and supplier credit models, the retailer with budget constraint
could, though not always, order more than the classic newsvendor
model without budget constraint, because either the 3PL firm or
the supplier will share a higher risk of demand uncertainty by
offering trade credit financing to the budget-constrained retailer.
The numerical analysis further indicates that, for the players, the
control role and supplier credit models can conditionally outperform
the classic newsvendor model without budget constraint,
especially when the initial budget is low, or high but constrained.
This outcome occurs because when the initial budget is low, the retailer
orders a relatively large quantity due to limited liability; and
when the initial budget is sufficiently high but still constrained, the
benefit of financial gain from ordering a larger quantity surpasses
the potential risk of demand uncertainty.
Our paper contributes to the literature in three main ways. First,
it bridges the literature gap on the 3PL trade credit/financing and
provides theoretical support to current practices by the 3PL industry.
Second, we also extend our analysis to compare the 3PL control
role model with the supplier credit model in terms of players’ profits.
Third, we perform an analysis from the perspective of interestdemand
elasticity and highlight the value of finance service by a
3PL firm with respect to the retailer’s initial budget.
The remainder of the paper is organized as follows. We review
the literature in Section 2. We describe the model and analyze the
traditional role in Section 3. We then explore the control role of the
3PL firm in Section 4, where the comparison of two different roles
is made as well. We extend our discussion to the supplier trade
credit model in Section 5 and conclude in Section 6. All proofs
are given in the Appendix (see online supplemental)