A cash-constrained stochastic inventory model with consumer loans and supplier credits: the case of nanostores in emerging markets

We consider a small traditional retailer that is managing its inventory under strict cash constraints, mainly because typically informal loans are offered to customers. These stores are widely present in emerging markets, and we refer to them as nanostores (also called ‘mom-and-pop stores’). As the suppliers require immediate payments for goods delivered, a nanostore can only replenish products to the level for which it has on-hand cash available. To improve delivery efficiency, a supplier might offer a nanostore credit for its replenishments. However, currently, suppliers are often reluctant to do so as these nanostores quickly go bankrupt or disappear, hence defaulting on all outstanding credits. The objective of this paper is to determine when it is beneficial to offer supplier credits. We propose a multi-period, stochastic inventory model, and numerically compare scenarios with and without supplier credits. Our study shows that even in the presence of this risk, suppliers often have good incentives to provide these credits, even if interest is not incurred. For this to hold, the operations of the retailer should be (a little) profitable in the first place, for which we provide analytical conditions.