Simultaneous Determination of Threshold Default Risk Criterion and Credit Term in Two-Staged Supply Chain

Setting default risk threshold to filter buyers eligible for credit granting is one of the key measures the supplier can take to deal with default risk issue in supply chain coordination. This paper presents a method to find the exact threshold default risk the supplier can accept by solving simultaneous equations derived from the bilevel programming modelling of the interactions between supplier and buyer. With cost function of the retailer and the incremental cost function of the supplier due to trade credit granting specified, a bilevel programming model to find the optimal trade credit policy can be set up. By solving this bilevel programming, the relationship between optimal credit term and corresponding default risk can be specified. Furthermore, the extreme situation where the threshold default risk is reached means the supplier will gain zero incremental profit at such a risk level. Thus, a system of two equations consists of two unknown variables of optimal credit term and threshold default risk can be set up. The exact default risk criterion can be found by solving these simultaneous equations.