Abstract: In the supply chain, trade credit is a widely used method of payment, which may transmit the volatility of market demand in the form of default risk to upstream firms. In order to reduce the default loss, we set up a modified newsvendor model combined with default possibility. The optimal lot sizes of manufacturer and retailer are derived separately under CVaR criterion, aiming to minimize unexpected loss. Finally, we analyze the effects of trade credit and quantity discount on the supply chain coordination. It is found that the manufacturer may deliver less orders because of the existence of the retailer's default risk. This phenomenon gets more significant when the manufacturer changes from risk neutral to risk averse. When the default possibility increases, less risk-averse manufacturers will reduce the retailer's order more sharply. Although a larger scale of loss can be avoided by cutting the order, the profits of both parties in the supply chain decrease, leading to the deviation from supply chain coordination. Trade credit can make the supply chain coordinated implicitly when the credit period is long enough. Moreover, quantity discount is able to improve the retailer's order quantity, but not to the extent of achieving supply chain coordination, which still depends on the risk aversion level of the manufacturer.

Key words: trade credit, risk management, CVaR, supply chain coordination, quantity discount