Two-echelon supply chain operational strategy under portfolio financing and tax shield

Pages633-656
DOIhttps://doi.org/10.1108/IMDS-07-2019-0395
Date31 December 2019
Published date31 December 2019
AuthorGuoshu Dong,Lihong Wei,Jiaping Xie,Weisi Zhang,Zhefu Zhang
Subject MatterInformation & knowledge management,Information systems,Data management systems,Knowledge management,Knowledge sharing,Management science & operations,Supply chain management,Supply chain information systems,Logistics,Quality management/systems
Two-echelon supply chain
operational strategy under
portfolio financing and tax shield
Guoshu Dong
College of Modern Service, Zhejiang Shuren University, Hangzhou, China
Lihong Wei
Shanghai University of Finance and Economics, Shanghai, China
Jiaping Xie
College of Business,
Shanghai University of Finance and Economics, Shanghai, China and
School of Business Administration,
Xinjiang University of Finance and Economics, Urumqi, China
Weisi Zhang
Institute of Logistics Science and Engineering,
Shanghai Maritime University, Shanghai, China, and
Zhefu Zhang
Department of Economy and Trade Management,
Zhejiang Institute of Mechanical and Electrical Engineering, Hangzhou, China
Abstract
Purpose The development of small- and medium-sized enterprises (SMEs) is vital to the economy, as such
the financing of SMEs has become the focus of government and enterprises. The purpose of this paper is to
find the operational and financial strategies of the supplier and retailer in supply chain.
Design/methodology/approach In a Stackelberg game, supplier moves first setting wholesale price,
while the retailer follows, setting the ordering quantity. Enterprises maximize their profits by optimization.
When measuring profit targets, the capital constraints and income taxes of two companies are considered.
In the portfolio financing model, the retailer can obtain products from suppliers through trade credit, and the
supplier can use asset-backed securitization (ABS) to solve his/her financing problems.
Findings The wholesale price is a decreasing function of retailers initial cash balance, and the suppliers
financing interest rate is a decreasing function of his/her own capital, the incentive effect of the suppliers
price discount strategy on retailer is more intense in the supply chainwith high-priced product or high-capital
retailer. And in a capital-constrained supply chain, an increase in tax rate or financing rate does not
necessarily motivate the supplier to increase wholesale price. Most importantly, if the suppliers markup is
moderate, portfolio financing has value for both retailer and supplier, while solving the financing problems of
both parties.
Research limitations/implications Future research can consider the explicit and implicit interest when
supplier provides trade credit to retailer. It is also possible to consider the portfolio financing when multiple
retailers are facing financial constraints.
Practical implications It provides guidance for supply chain enterprises with financing needs, helping
them find optimal decisions. With financial interest, enterprise income tax on the enterprisesfinancing
factors will produce a tax shield effect; thus, a costbenefit analysis with the tax shield effect can provide
more accurate picture when making corresponding decisions.
Social implications Government takes feasible adjustments of tax rate for the sake of motivation on
financial SMEs tax shield. Furthermore, ABS calls for service from financial institutions, which will, in turn,
expedite financial institutions revenue.
Received 21 July 2019
Revised 30 November 2019
Accepted 11 December 2019
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/0263-5577.htm
The work was supported by the National Social Science Foundation of China: Grant No. 15ZDB161,
Research on the evolution of industry and enterprises in green whole industry chain.
Portfolio
financing and
tax shield
IndustrialManagement& Data
Systems
Vol.120 No. 4,2020
pp.633-656
©EmeraldPublishingLimited
0263-5577
DOI10.1108/IMDS-07-2019-0395
633
Originality/value The authors provide insights on enterprise financing models, combining ABS with
trade credit, expanding enterprise financing channels and enriching the theory of financial supply chain and
supply chain management. The authors analyze in detail the influence of tax factors on enterprises by
introducing tax factors into traditional process of enterprise operation and financing strategy.
Keywords Trade credit, Supply chain finance, Tax shield, Asset-backed securitization
Paper type Research paper
Highlight
(1) Portfolio financing is the combination of asset-backed securitization and trade credit.
(2) Portfolio financing has significant value to the whole supply chain with
moderate markup.
(3) The suppliers price discount strategy is more effective in the supply chain with
high-priced product or high-capital retailer.
(4) For low-value products, tax abatement is more effective.
(5) For products with moderate value, the increase in financing interest rate reduces the
wholesale price.
1. Introduction
In the supply chain, when the downstream enterprises lack funds, the upstream enterprises
are more willing to provide trade credit to facilitate the completion of the transaction.
However, upstream companies are sometimes subject to financial constraints, and their
financing instruments together with trade credit can form a portfolio financing.
Traditional research on the portfolio financing tends to prefer the combination of bank
loan (BL) and TC to other financial combinations, but excessive BLs make upstream
suppliers face higher marginal bankruptcy critical sales and lower channel profit margins
(Dou and Zhu, 2014). Obviously, rational suppliers will try to avoid using BLs and consider
other financing methods on the premise of multiple financing options. Asset-backed
securitization (ABS) is a financing option. Taking Xinjiang Goldwind Sci & Tech Co. Ltd as
an example, the company issued wind power ABS in August 2016 with a scale of RMB
1.275bn. The basic assets of wind power ABS financing are the electricity fee income rights
of the wind power project in 20162021. In this practice, the upstream company Goldwind
Sci & Tech used ABS with future income rights to finance.
When a supplier finances through ABS, he/she does not have to face the risk of failing to
recover the debt at maturity or the obligation to repay the bank debt, which may lead to
bankruptcy. Based on the above reasons, this paper mainly studies the portfolio financing
model combining ABS and TC, and provides guidance for optimizing the financing and
operational strategies of enterprises in the supply chain.
Tax instruments are important means for the government to regulate social
and economic activities, introducing tax factors into the supply chain facilitates
policy makers to decide whether to carry out the tax reform or not (Xu et al., 2018).
Introducing tax factors into the supply chain can not only help government decision
makers, but also is critical to business decisions. According to Chinastaxlaw,
when calculating corporate income tax, enterprises can deduct financing interest in
advance. Therefore, if they have the same income, the income tax of the debt-raising
enterprise is lower than that of the debt-free enterprise. The reduction of such tax
expenditure is called the taxshieldeffect.Therefore, this paper introduces tax factors
into the target profit and decision-making process, and considers the optimized business
strategy of financing enterprises.
IMDS
634
120,4

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