The influence of positive and negative salvage values on supply chain financing strategies

We establish a supply chain finance scheme containing a cash-strapped supplier, a creditworthy retailer as well as a financial institution to explore whether the positive or negative salvage value has a crucial impact on the order decisions and financing strategies. Buyer-backed purchase order financing and advanced payment discount (APD) financing are considered to settle the supplier’s fund shortage problem. We found that the positive and negative salvage values affect (1) the retailer’s optimal order quantity. The buyer orders more products with positive salvage value than those with no salvage value and reduces orders for items with negative salvage value; (2) the profits in the supply chain. Ordering items with a positive salvage value can reduce the risk of loss compared to orders with no salvage value, which leads to more gains for the buyer and the whole supply chain, while orders for items with negative salvage increase the losses, resulting in lower profits; (3) the threshold of the retailer’s internal asset level under single financing. The higher salvage value brings more inventory risk to the retailer; hence the retailer should have a higher asset level to ensure that there is sufficient capital to finance the supplier via APD. Finally, we verify the results by numerical experiments and present some managerial implications for different industries.