3PL Financing: A New Supply Chain Solution

Third-party logistics (3PL) providers are becoming a popular source of financing for capital-constrained retailers. In addition to traditional financing options, such as trade credit and bank loans, 3PLs can now offer financial services to retailers. These services can provide several benefits, including:

  • Reduced risk for the 3PL: Because the 3PL is already managing the flow of goods, they are in a good position to monitor inventory and reduce the risk of financing.
  • Increased profits for the 3PL: By offering financing, 3PLs can increase their revenue and profitability.
  • Improved access to capital for retailers: Small and medium enterprises often face financial constraints. 3PL financing can provide them with access to the capital they need to grow their businesses.

This blog post will explore the optimal operational strategies of a supply chain system where the 3PL provider offers financing services to the retailer. It will also consider how the capital-constrained supply chain system can achieve overall coordination.

The Model

The study in the source considers a supply chain consisting of:

  • A supplier: The supplier manufactures the products and sells them to the retailer.
  • A capital-constrained retailer: The retailer orders products from the supplier and sells them to customers. The retailer has limited initial capital and must borrow from the 3PL to purchase inventory.
  • A 3PL firm: The 3PL firm provides both logistics and financing services to the retailer.

The model uses a three-stage Stackelberg game to determine the optimal operational strategies. In a Stackelberg game, the leader makes the first move, followed by the sub-leader, and finally the follower. In this case, the supplier is the leader, the 3PL firm is the sub-leader, and the retailer is the follower.

The sequence of events is as follows:

  1. The supplier sets the wholesale price.
  2. The 3PL firm determines the interest rate for the loan.
  3. The retailer decides on the order quantity.
  4. The supplier pays the transportation fee to the 3PL.
  5. The 3PL transports the products to the retailer.
  6. The retailer repays the loan and interest to the 3PL or goes bankrupt.

Optimal Strategies under 3PL Financing

Retailer’s Ordering Strategy

The retailer’s optimal ordering quantity depends on:

  • The supplier’s wholesale price
  • The 3PL’s interest rate
  • The retailer’s initial capital

The retailer must also consider the risk of bankruptcy. If the retailer’s revenue is insufficient to repay the loan and interest, the retailer will go bankrupt.

Key findings:

  • 3PL financing can increase the retailer’s order quantity. This is because 3PL financing allows the retailer to overcome its capital constraints and order more inventory.
  • The retailer’s optimal ordering quantity decreases as its initial capital increases. This may seem counterintuitive. However, if the retailer has more initial capital, it faces a greater potential loss if it goes bankrupt. To reduce this risk, the retailer will order less inventory.

3PL’s Financing Strategy

The 3PL’s profit is comprised of:

  • Financing profit: The interest earned on the loan to the retailer
  • Transportation profit: The profit earned from transporting the products

The 3PL must consider the risk of the retailer going bankrupt. If the retailer goes bankrupt, the 3PL will only receive the retailer’s revenue, not the full loan amount.

Key findings:

  • The 3PL’s optimal interest rate decreases as the retailer’s initial capital increases. This is because, with a higher initial capital, the retailer needs a smaller loan. The 3PL can encourage the retailer to accept the financing service by offering a lower interest rate.
  • The 3PL’s optimal interest rate depends on the supplier’s wholesale price. A higher wholesale price increases the retailer’s ordering cost. To encourage the retailer to order more, the 3PL may offer a lower interest rate.

Supplier’s Wholesale Strategy

The supplier’s profit depends on:

  • The wholesale price
  • The retailer’s order quantity
  • The transportation fee paid to the 3PL

The supplier must consider the impact of its wholesale price on the retailer’s ordering decision and the 3PL’s interest rate.

Key finding:

  • The retailer’s optimal ordering quantity decreases as the supplier’s wholesale price increases. A higher wholesale price increases the retailer’s costs and bankruptcy risk. Therefore, the retailer will order less inventory to manage the risk.

Supply Chain Coordination

To maximize the total profit of the supply chain system, the supplier, retailer, and 3PL must coordinate their decisions.

Under decentralized decision-making, the total profit of the supply chain system is less than the total profit under centralized decision-making. This is due to the double marginalization effect: where both the supplier and the 3PL add a markup to their costs, which leads to a higher price for the retailer and lower overall demand.

Key finding:

  • Wholesale price contracts can coordinate the supply chain system under certain conditions. If the supplier’s wholesale price and the 3PL’s interest rate are set appropriately, the retailer’s order quantity will be the same under both decentralized and centralized decision-making. This will maximize the total profit of the supply chain system.

Conclusion

3PL financing is an innovative solution for capital-constrained supply chains. It can benefit all participants in the supply chain, including the supplier, the retailer, and the 3PL.

However, to achieve the full benefits of 3PL financing, supply chain coordination is essential. Wholesale price contracts can be used to achieve coordination, but the supplier and the 3PL must work together to set the wholesale price and interest rate appropriately.

Reference

Huang, S., Fan, Z., & Wang, X. (2019). Optimal operational strategies of supply chain under financing service by a 3PL firm. International Journal of Production Research, 57(11), 3405–3420. https://doi.org/10.1080/00207543.2018.1534017