Supply chain finance solutions in joint working capital management

Supply Chain Finane Solutions in Joint Working Capital

Management

⋆

Yana I. Kuzmina

1

and Nikolay A.Zenkevih

2

1

LLCMaersk

140/2Moskovskiypr.,St.Petersburg,196006,Russia

E-mail:yana.kuzminamaersk.om

2

Graduate ShoolofManagement,St.Petersburg StateUniversity

Russia,199004,St.Petersburg,Volkhovskiyper.,3

E-mail:zenkevihgsom.spbu.ru

Abstrat Theresearhisdevotedtojointworkingapitalmanagementin

supplyhainsaiming toimprove joint workingapitalmanagement meth-

odsthroughminimizationofnanialsupplyhainostsonworkingapital

usingSupplyChainFinane(SCF)Solutions.ThoughSCFappliabilityin

Finanial Supply Chain management has reently been studied to relieve

aesstoapitalsoures,managerialperspetiveofSCFsolutionsisstillun-

investigatedaswellasfewotherareas. Theresearhsuggests amanagerial

algorithm thatontains fourdevelopedmodels:themodelofCollaborative

ash onversion yletwomodelsof SCFsolutionsandthe modelofJoint

WorkingCapitaloptimization.ThemodelsimplyusingsuhSCFsolutions

as Fatoring,ReverseFatoringand InventoryFinaningto improveJoint

WorkingCapitalintermsofosts onit andliquidity ofbothsupplyhain

membersand entirehain, providing the optimal onditions of SCF solu-

tions. Quantitative optimization with SCF solutions demonstrates onthe

ases of supplyhainsthe improvementof nanialposition and liquidity

of all hain members.The researhhas a potentialto deapplied inbusi-

nesses sine the algorithm representsa omprehensivemanagerial tool for

Joint Working apital management insupply hains. It might be used to

ahieveoptimalashonversionylevaluesforminimalsupplyhainosts

onworkingapitalonstrainedbyliquidityandprotabilitytargetlevels.

Keywords:Collaborative CashConversion Cyle,Supply ChainFinane,

Working Capital Management, Supply Chain Finane Solutions, Reverse

Fatoring,InventoryFinaning.

1. Introdution

Thereenteonomidownturnausedonsiderableredutioningrantingofnew

loans,withasigniantinreaseintheostoforporate borrowing.Consequently,

itisbeomingmorediultfortheompaniesallovertheglobetondsouresfor

naningtheiroperationalativityfaingsuhproblemsasdiultieswithaessto

apital,limitednanialinfrastruture,andlegalregulatoryandaountinguner-

tainties(ACCA,2017).Forthisreason,ompaniesaimtoapplydierentmethods,

whihmightbehelpfulforeetiveworkingapitalmanagementinordertorelease

moreash tiedupinit, e.g.ininventoryandaountsreeivable.

⋆

Researh has been onduted with nanial support from SPbU grant (projet No.

Sinenoompanyworksindividuallyonamarket,itisreasonabletoonsidera

wholesupplyhain.Whereasalotofattentionintheeldofsupplyhainmanage-

mentispaidtostudyinginventorymanagement,transportationostsorostsasso-

iatedwithprourementproedures,afewresearhpapers,however,arefousedon

theowsofmoney(Kouveliset al.,2006).Alongwiththat,forfasthangingbusi-

nessenvironmentthatmoneyowsareofthesameimportaneasthemanagement

ofowsofgoodsGuptaand Dutta(2011).Consequently,workingapitalmanage-

menthasbeomearuiallyimportanttermin nanialsupplyhainmanagement

gainingalotofattentionfrom theaademiaside.

Managingworkingapitalandliquidityisanessentialpartofompanies'ativity

beause the majority of their daily operations depends on and is determined by

working apital, in suh a manner inuening ompanies' results. Considering a

supplyhainthesituationisnowaydierent:allmembersofasupplyhainstrive

to their individual higher liquidity, individual lower ostson working apital and

maximal prot.At thesametime, theyall aim at higherliquidity, lowerostson

workingapitalandmaximalprotofawholesupplyhain,whihtheyoperatein.

With the referene to theforegoing, it is worth studying dierent approahes

tosupportoperationalativityofthesupplyhainmembersthroughimprovingits

workingapital.AordingtoCaniatoetal.(2016)thereisalakofmethodologyto

identifyproperwayofworkingapitalmanagementinsupplyhainsinpratie.In

thisregard,newtoolofworkingapitalmanagementsupplyhainnane,whih

allowsompaniestonaneitsoperationalativityundermoreattrativeonditions

and, therefore, may be used to optimizeworking apital in supply hain is going

to be studied. Thus, the researh gap is expressed in uninvestigated managerial

perspetiveofsupplyhainnanesolutionsadoptionandinalakofunderstanding

whih partiular solutions may be applied and how in order to improve working

apitalinasupplyhain.Therefore,researhgoalistoimprovejointworkingapital

management methods through minimizationof nanial supply hain osts using

supplyhainnanesolutions.ResearhObjetivesareasfollows:

•

^{Toidentify suitablesupplyhainnanesolutionsbasedonliteraturereview;}

•

^{Toestablishthemodelof}ollaborativeashonversionyle;

•

^{Tomodelsupplyhainnanesolutions;}

•

^Todeveloptheoptimizationmodelofjointworkingapitalinsupplyhain;

•

^{Toverifythedevelopedmodelsusingasestudyanalysis.}

Thesubjetof themasterthesisisworkingapitalof asupplyhain. Itis dened

as the sum of individual ompanies' working apital, whih are inluded in one

supply hain. The objet of the researh is two-stage supply hain that inludes

either the relations between supplier and manufatureror those of manufaturer

and distributor. Being haraterized by bilateral relations between partners, this

type of supply hain allows to assume high level of oordinationthat is ruially

importantforthepresentstudy.

Themethod usedintheresearhisoptimization modeling.Besides, theresults

of methodologydevelopedare veried byasestudy method. Cases arepresented

by six two-stagesupply hains taken from three dierent industries:Automotive,

ICT,andFMCGsetor.

Thepaperonsistsofthe followingparts:threehapters,introdution, onlu-

2. WorkingCapitalManagementinSupply Chain:TheoretialReview

and Pratie

Conept of working apital managementapplied in supply hain management

hasgained alot of attentionreentlyand beamefundamental in nanialsupply

hainmanagement.Oneofthemainreasonstothat istheproblemofliquidityand

freeaesstoash.Whileinvestigatingtheorrelationbetweenpropermanagement

ofsupplyhainandnanial indiatorsofompaniesinvolvedinahain Lewinski

and Wassenhove(2003)laim that growthrate of market apitalization is higher

forompanieswhihpayalotof attentiontosupplyhain management.However,

followingthisreasoningitshouldbetakenintoaountthatsupplyhainmanage-

mentis basedon establishmentsteady partnershiprelations. Thus, improvements

(espeially in the eld of working apital management)may beahieved entirely

throughooperativeeortswhenallmembersofsupplyhainareinterestednotonly

in personal short-term benets but also in nal result of a supply hain ativity.

Otherwise,shorttermnanialimprovementsareahievedthroughdisplaementof

risksandoststoothermembersofahain;e.g.suhpratiesasextremeextension

of paymentterms for aounts payable,enfored reoveryof aounts reeivables

andpoorinventorymanagementareused.

2.1. Supply ChainManagement Conept

For the purpose of the researh we introdue widely used denition of SCM

givenbyCounilofsupplyhainmanagementprofessional.SCMenompassesthe

planningand managementof all ativitiesinvolved in souring and prourement,

onversion,andalllogistismanagementativities,italsoinludesoordinationand

ollaborationwith hannel partners:suppliers, intermediaries, third party servie

providers, and ustomers.In essene, supplyhain management integratessupply

anddemandmanagementwithinand arossompanies.(SCSMP,2019)

Mentzer (2001)proposes three main typesof SC struture whih dier in the

omplexity (Figure 1). Diret SC is the most ommon struture whih implies

3 stages: supplier, manufaturer and ustomer, and ows of dierent nature be-

tweenthem:material (produts),nanialand/or informational.Thisstruture is

basifor its simpliity and fundamental ideaat the sametime. Thenext level of

omplexityof SC is ExtendedSC. Twoother stages areassumed: supplier ofan

alreadyexisting supplierandustomer ofanalreadyexisting ustomerare added;

therefore,ExtendedSC is5-stagesupplyhain.Thesupplyhainonthebottom

UltimateSC isoneofmaximalomplexity.Itshowssomeoffuntions,whihare

to perform within SC, being aomplished by third party rms. In this example

there arethree typesof suh rmsfordierentreasons. Relationshipbetweentwo

entitiesissupportedbyananialproviderwhihoersnanialsolutionsandsup-

portassumingnanialrisks.Alsothereisa3PLlogistisprovider(logistisservie

operator)whihtakesresponsibilitiesofwarehousing,transportationandotherlo-

gistisativities.Finally, amarket researhrmolletsandanalyzesinformation

aboutultimateustomertoprovidethewhole SCwithustomers'preferenesand

expetations.

As it follows from SCM denition and types of SC strutures proposed by

Mentzer(2001),SCMisaboutoordinationofvariousowsbetweenentitieswithin

Fig.1.Supplyhainstrutures.Soure:Mentzer,(2001)

nanialperformaneandostswhihoriginatthroughonsideringsupplyhainas

anentireentitybut notasseparateparts.

Figure2presentstheorganizationofmaterialandnanialowsontheexample

of3-stage SC.Depending onthetypeof ownotonlymaterial, but alsonanial

supplyhainmaybeonsideredforresearhesandpratialimprovement.Inaddi-

tion,GuptaandDutta(2011)identiedthreemaintypesofowinSC:downstream

owofgoods,upstreamnanialowandowofinformationwhihisupstreamas

wellasdownstream.

Fig.2. FlowsinSC.Soure:reatedbytheauthor

In a material SC the study subjet is the proesses of physial movement of

goods through the hain (shipment, transportation,inventory management, et.)

whereasinananialsupplyhain nanialowsaompanyingthesematerials

ows.InmaterialSC itbeginswithsouringof materialsoromponentsandends

withbringingnishedgoodstoaustomer.Asnoompanyplaysindividuallyatthe

market,itisassumedthatalmostallthermshavesuppliersaswellasustomers;

hene,therearenanialowsbetweenthem tyingphysialoperations.

Wedene FSCM followingof Wuttkeet. al(2013) asoptimized planningand

ontrol of nanial ows in SC for eetive management of material ows. Two

aspetsoftheonnotationareofprimeimportane:fousontheintegrationofthe

managerialproessesofnaneandgoodsinSCand interdisiplinaryapproahto

denition.

2.2. Coordinationin SupplyChain to Maximize Prot

OntheearlystagesofSCMformationmanyauthorsemphasizedthatSCMisa

managementphilosophyaordingtowhihSCisonsideredasanentityratherthan

Following this philosophy and adopting it to business reality to establish supply

hain managementseveral ativitiesareto beperformed.Mentzer(2001)develops

alist of suh ativities, whih inludes but is notlimited to integrated behavior,

building and maintaining partnership, information sharing,and ooperation. The

latterempowersustoassumeintegratedreasoningandunityofpurposesandeorts

withinasupplyhain.

Anderson and Narus (1990)dene ooperation as someoordinated ativities

(similar oromplemented),whih areperformed bysupply hain partners aiming

at superior mutual outome. In other words, thewhole resultof a supplyhain

is greater than the sum of the results of single rms within SC. Existing in dif-

ferentforms suh asjointplanningandontrol,design ofqualityontrol,delivery

andpaymentsystems,jointworkofprodutdevelopment,whihomposethreekey

elements: information systems, inventorymanagementand supply hain relation-

ships, ooperation pursue supply hain ost redution and ustomer servie level

improvementmainly.(Power,2005).

Takeninto onsiderationthat rmsinludedin supply hain presentsingle in-

dividual organizations, they are highly motivated to improve their own results,

therefore,theresultsofthewholesupplyhainarenottheirrstpriorityandwhole

performaneofSC maysuer.Inthis regard,oneof themostimportanttasksfor

SCM is to elaborate atoolfor motivating all independent members of ahain in

order to optimize whole supply hain performane throughoordination.(Labiad

et al., 2012). Sine deentralized supply hains, whih are haraterizedby many

independentdeisionmakerswithdierentobjetivesinahain,arewidelyknown

inpratie,themehanismofoordinationisvitaltomotivatethemforjointwork

toinreasetotalperformane.AordingtoGiannoaroetal.(2004)amongoor-

dinationmehanismsaswellastoolsofmotivatingsupplyhainmembersontrats

areessentialinstrumentswhiharein generalusein pratieoverthedeadesand

maybetailoredfordierentindustries andpurposes.

Supply hainontratsareusually to regulatebilateral business relations,e.g.

betweenmanufatureranditssupplierorbetweenmanufatureranditsdistributor.

Theretermsofpayment,termsofdelivery,obligationsofpartiesonernedandso

on are determined. However, in the reent years the oordination theories in SC

and their appliation to ahieve ommon goals have got widespread (Taleizadeh

et al., 2017, Sarkaret al, 2018). It is noteworthy, that the majority of these o-

ordination theories are based on dierent types of supply hain ontrats. There

are many ontrats forms used in pratie and studied by researhers whih are

eetivetoemployin omplianewithdierentissuestoberegulatedorimproved.

Thus, Ladiad et al. (2012) divided oordinatingontrats into two main groups:

Quantitydependent(QuantityDisounts,Quantityexibilityontrats)and Prie

dependent (Wholesale prie,Buybak or Return poliies, Revenue Sharing, Sales

rebate, QuantityDisount). Furthermore,Taleizadeh et al. (2018)adds one more

groupofinentiveontratswhihinludesDelayin paymentandMarket segmen-

tationontrats.However,thesopeof thispaperis restritedto revenuesharing

ontrats,beauseby denition it ensuresmotivation of all supplyhain member

forjointationsto maximizeommonprot.

Under revenue sharing ontrat it is determined that one agent shares with

anotheroneagivenperentageofthegeneratedrevenueoftenin exhangeoflower

pries(Govindan&Popiu,2011).Forexample,adistributorbuyssomegoodsfrom

a manufaturer and has to pay for them; however,in these settings adistributor

also pays additionally to manufaturer predened in the ontrat perentage of

revenue.Ontheexampleof3-stageSCGiannoaro&Pontrandolfo(2004)proved

that this type of ontratsallows to oordinate supply hain and through prot

alloationimprovenanialresultsnotonlyof singlemembersof ahainbut also

theirommonprot.

Maximizationof prot generallymeans minimizationof osts, and that is the

keyfatorintoday'shighlyompetitiveenvironment,onsequently,oneofthemost

important goals of any organization or supply hain. Aiming at inreasing prof-

itabilityompaniesstartto applydierentstrategiesinmarketing,manufaturing,

inventorymanagement,expansionofativitieset.,ortheylookfordierentpossi-

bilitiesforostredution.Thatiswhy,beingmotivated tomaximizetotalprotof

asupplyhain,itsmembersanndsuhapossibilityintheeldofworkingapital

management,inpartiularinnanialostsassoiatedwithworkingapital.Thus,

thenextparagraphofthepaperisdevotedtodisussionofjointworkingapitalin

supplyhains.

2.3. Costs on Working Capital and Cash Conversion Cyle: from a

Single Company'sPerspetive toa SupplyChain.

Pirttila(2014)denesworkingapital(WC)astheapitalofabusinesswhih

isusedinitsday-to-daytradingoperations,alulatedasurrentassetslessurrent

liabilities. Using another speiation WC may be identied as amount of ash

that is tied up at eah stage of SC (Viskari, 2012). Basially, WC is nanial

supportofday-to-dayompany'sativity.

Intheliteratureadistintionismadebetweentwomainperspetivesofworking

apital whih are dierent in theinterpretation. The rstone isdened byJones

(2006) as the ability of the ompany to over its short-term debt with urrent

assets andmaybeevaluatedasfollows:

Workingapital

=

^{CurrentAssets}

−

^CurrentLiabilities. (1) Jones(2006)inludesash,totalinventory,aountsreeivable,seuritiesandash

equivalentsin urrentassets,and, ontheotherside, urrentliabilitiesompriseof

aountspayable,aruals,notespayableandshort-termdebt.

AnotherperspetiveofworkingapitalisstudiedbyPirttila(2014).Consisting

ofthetotallevelofinventory,aountsreeivable(AR)andaountspayable(AP),

whih are often alled in the literature operation omponents of WC (Monto,

2013),WCisdenedasthefollowingequation(Pirttila,2014):

Workingapital

=

^Inventory

+ AR − AP.

⁽²⁾

WC may be either positiveor negative. Negativevalue of WC indiates inability

to pay o short-term debt (Talonpoika& Karri,2014); whereas positivevalue of

workingapitalisindiativeofsuientliquiditymeaningthattheamountofash

whihisgoingtobegotbytheompanyduringthenextyearislargerthanliabilities

to over. (Monto, 2013). In other words, level of inventory kept plus AR to be

reeived is suient to overliabilities. However, keeping high level of inventory

is assoiatedwith high storageosts, moreover,inventoryis notash learly,it is

ratherashtiedupinphysialinventory.Hene,thereisatradeobetweenlowand

negativelyaetnanialhealthofaompanyandsupplyhainaswell,espeially

itsworkingapitalprotability(Nemtajela,2016).AordingtoKumar(2017)high

level of oordination in supply hain may insure ahievement of well-established

inventory management. Motivation to inrease the nal results of asupply hain

allowstomakemutualdeisions,shareneessaryinformationandplanjointly,asa

result,todereaseinventorylevels.(Kumar,2017)

TomeasureandontroltheeetivenessofworkingapitalmanagementRihards

andLaughlin(1980)introduedtheoperationalapproahtoevaluateworkingap-

ital on the basis of relative ratios - time-based measure of ash onversion yle

(CCC).AordingtotheauthorsCCCanbedenedasfollows:TheCCC,byre-

etingthenettimeintervalbetweenatualashexpendituresonarm'spurhase

of produtive resoures and the ultimate reovery of ash reeipts from produt

sales, establishes theperiod oftime required to onvert a dollarofash disburse-

ments bak into a dollar ash inow from a rm's regular ourse of operations

(Rihards, Laughlin,1980).Nowmanyresearhesagree thatCCC is anappropri-

ate dimension for working apital management whih presents the time interval

(indays)betweenarmexpandsmoneyforpurhaseof goods(orbuild upinven-

tory)anditreoversashfromsellingthegoods(inventory)(Yazdanfar&Ohman,

2014).Fromadierentangle,CCC showsthenumberofdayswhenapitalistied-

upwithinbusiness ativitiesofarm(Wang,2019).Inanyrespet,CCC onsists

of three sub-yles:the yle time ofinventories(DIO) plus theyle time of a-

ounts reeivable(DRO) minus the yle time of aounts payable(DPO). Thus,

thefollowingequationevaluated CCCas:

CCC = DIO + DRO − DP O.

⁽³⁾

CCCanbeeithernegativeorpositive.NegativeCCCmeansthataompanykeep

lowlevelofinventoryand/orreoverashfromitsustomersforgoodssoldbeforeit

hastopayoitsAP(relevanttoprepaymentsheme).Manyresearhesholdtoan

opinionthatthelowerCCCis,thebetteraompanyanmanageitsash,although

extremelylowCCCanindiatetheproblemswitheahomponentofCCC.Atthe

sametime, reasonablylowCCC implieslowoststonaneitsbusinessoperation

or,saiddierently,lowostsonworkingapital(Tangsuheeva&Prabhu,2013).In

theseirumstanes,theproblemofidentiationanoptimumlevelofCCCours

withaneetonprotabilityandliquiditylevelof anyompany.

Hofmann&Kotzab(2010)provethat theminimizationoftheCCCyle from

asingleompanyperspetivedoesnotaddvaluetoallmembersinasupplyhain.

Theyproposeto applyollaborativeapproahesbeausethereis ahugedierene

betweenCCCinasingleompanyandCCCofawholesupplyhain,andimprove-

mentsofworkingapitalusingpushingmethodssuhasaountspayableextensions

to suppliersorenforement theolletionof moneyfrom ustomers areineient

praties whih may result in higher supply-based risks or even loss of nanial

stability.

The authorsfor thersttime everintroduetheollaborativeash onversion

yle(CCCC)model.TheydeneCCCCasasumoftheash onversionylesof

allexhangepartners(membersof supplyhain).Theyonludethatredutionof

ashonversionyleforasingleompanyinahain(possiblyduetotheexpenseof

suppliersorustomers)doesnotaddvaluetootherSCpartners.Thus,theoptimal

maximizingthegains ofreeivedasharossallollaborationmembers(Hofmann

andKotzab,2010).

AlthoughCCCCisdenedasasumofCCCofallpartnersinSC,itisassumed

thatinollaborativeSCinternalpaymentsbetweenpartnersdonotinueneCCCC,

andonsequently,maybenegleted(HofmannandKotzab,2010).Therefore,CCCC

forthe3-stagesupplyhainis denedbythefollowingequation:

CCC = DIO 1 + DIO 2 + DIO 3 + DRO 3 − DP O 1 .

⁽⁴⁾

To eliit total nanial supply hain osts on working apital we introdue the

formula of nanial osts on working apital for a single ompany. Viskariet al.

(2013)dene theostsasthefollowingequation:

F C = IN V ∗ h

(1 + c) ^{DIO 365} − 1 i

+AR ∗ h

(1 + c) ^{DRO 365} − 1 i

− AP ∗ [(1 + c) ^{DP O 365} − 1].

⁽⁵⁾

whereannualostofapital.

FollowingHofmannandKotzab(2010)andonsideringCCCCasasumofCCC

ofallthemembersofsupply hain,wedenetotalnanialsupplyhainostson

working apitalasfollows(assuming3-stagesupply hainwith singleompanyon

eahstage):

T F C = X 3

l=1

F C l ,

⁽⁶⁾

wherelthe stageofSC.

2.4. Cash Conversion Cyleand Protability

Sine it is proved in a large number of researhes that WCM inuenes or-

ganization'sprotability and liquidity, deisionsaboutit are ruial forbusiness.

RelationshipbetweenCCCandprotabilityoforganizationisimportant.Although

someauthors laim that minimal length of CCC leadsto higher protability (e.g

Musettola,2014;ZeidanandShapir,2017),someresearhersstudyoptimallength

ofCCC andvaluesofitsomponentstoahievegreaternanialresultsand om-

pany'svalue(e.g.Garanina&Petrova,2015;Shahetal.,2018).AordingtoPavlis

etal.(2018)apparentontraditionbetweentheresultsmaybeexplainedasfollows:

inreasein CCCimpliesinreaseinDIOandDRO,whihmeans,thereby,inrease

in ostson working apitalmaintenane. Thus, the longertheCCC is, thehigher

nanialostsonworkingapitalare,andthelowerprotabilityofarmis.

When onsidering assoiation between WC and protability the problem of

liquidity-protabilitytradeo ours.Banos-Caballero(2012)reportsU-shapedre-

lationshipbetweenthesevariablesanalyzingthesampleofnon-nanialrms.The

optimalamountofWCshouldbefoundinordertoimproveprotability.

Inthisregard,theresearhofGaraninaandPetrova(2015)provesthatworking

apitaldeterminesurrentompany'soperationsand, asaonsequene,inuenes

thenanial resultof abusiness. Alsothe researhjusties that theuse of inor-

ret working apital management models maylead to returnratios of an organi-

volumeofworkingapitaldoesaompanyneedtoensureeetiveness,ontheone

hand,andmaintainitssolveny,ontheother(Garanina&Petrova,2015);aiming

atidentiationofwhat inueneurrentliquidityratioandashonversionyle

hasonthereturnonnetoperatingassets(RNOA's)oftheRussianompanies.As

one of the main resultsof the researh the authors onrm that ash onversion

yle is in diret relationswith ompany'surrentratio. Moreover,with thehelp

ofregressionanalysisoptimumvaluesofashonversionyletomaintainrequired

level of liquidity (urrent ratio) were alulated. Thus, to reah maximal rate of

returnitisneessarythatthetarget valuesoftheash onversionyleshould be

inthebordersofthereommendedintervalsofvalues.

2.5. Supply ChainFinaneSolutions: Conept and PratialUsage

Noneedtoprovethatsupplyhainmanagementhashighinueneonnanial

performaneofaompany(HofmannandKotzab,2010).However,asofnownan-

ialdeisionmakingandsupplyhain managementareimportantto beintegrated

beauseofmanyreasonswhiletheweightiestargumentinitsfavoristhatthevalue

ofawholesupplyhainisgreaterthanthesumofitsmembers,ifproperlymanaged.

Inthisregard,itisessentialformaintainingandstrengtheningbusinessposition

to integrate material ows with information and nanial ones within the supply

hain,whihistheprimarygoalofsolutionsandprogramsforworkingapitalman-

agement(Wuttkeet al.,2013).Amongthese solutionssupplyhain nane(SCF)

needstobehighlightedasoneofthemostimportantapproahes.Forthersttime

thisterm wasintrodued by Hofmann(2005).Heidentiesitsappliabilityasfol-

lows:SCFaimstooptimizenanialowsataninter-organizationallevelthrough

solutionsimplementedbynanialinstitutionsortehnologyproviders(Hofmann,

2005).Obviously,theinstrumentprovidesdierentbenetsforsupplyhainswhih

anbenotonlymeasurableandostredution-orientedbutalsofousedonstrength-

eningthe nanialposition andimprovementrelationshipsbetweenmembersofa

hain (newopportunitiesfor obtainingloans,trustandommitmentthroughouta

hain)(RandallandFarris,2009).

ForthereentyearsSCFhasbeenativelygainingtrationfromthesidesofboth

pratitionersandaademisalongwiththeexpansionofthewholeSCFmarket.Re-

searhersfousmainlyondesriptionthevarietyofSFCsolutions.However,inthe

literatureitwasfoundontroversialdenitionsofSCFwhihtreatthephenomenon

fromdierentperspetive:nane-orientedandsupplyhain-oriented.Therstone

isorientedmainly to nanialsideand treatSCFasarangeofnanial solutions

provided by nanial institutions. Moreover,byLamoureux & Evans (2011)SCF

onernsnanialsolutionsmainly.Wuttke(2013)holdstoevenmoreonservative

opinion and denes SCFasjust reversefatoring; however,the onvition isthat

reversefatoringisoneofmanySCFsolutions.Onemoreharateristiofnanial

perspetiveisorientationto aountspayableand aountsreeivablemostlybut

At the same time, aording to supply hain perspetive SCF is onsidered a

set of solutionsaiming for improvementhain's naning; therefore, the range of

solutionisnotlimitedbythosewhihprovidepartiipationofnanialinstitution,

andthereforeinventorymanagementanbetakenintoaount.

Nowadays aligningmaterial and nanialowsof SC is oneof the main hal-

lenges fororganizations, whih often annotbeoveromewithout anytype of ex-

ternal support. Having an ultimate goal of the extension of working apital to

inter-organizational level (Homan, 2005) SCF is the essential tool to smoothen

business operationsand inreasethe valueofompaniesthrough integrationof -

nanial proesses along a supply hain (Pfohl & Gomm, 2009) with the reation

of monetary-related win-win strategy. SCF allows to get faster aess to ash for

supplierswhileenablingthedelayofpaymentforbuyer,whihanimprovesupply

hain performane. Aordingto Wuttkeet al.(2016)andGelsomino et al.(2018)

SCFisto optimizeworking apitalwiththehelp ofimplementedsolutionsoered

by nanial intermediaries, logistis operators or other possible members of SC.

Caniatoetal.(2016)identifythreemain benetswhihompaniesgetbyadopting

ertaintypesofsupplyhainnanesolutions:

•

^{redution of CCC due to derease of} DRO/inrease of DPO or derease of inventoryandDIO.ThisbenetforSCisalsodisussedbytheotherresearhers

(e.g. Klapper&Randall(2011);Kiesmuller&Broekmeulen(2010)).

•

^{inrease of joint prot through redution of osts on working apital due to}

ahievementbettervaluesofCCComponentsadoptingSCFsolutions.

•

^{strategi benetsassoiatedwith}improvementof partnershiprelationsand - nanialriskmanagementisSC,ahievablethroughbetteraesstonane.The

researhesofPhohl&Gomm(2010);Hofmann(2005);Wuttkeetal.(2013)also

demonstratetheseissues.

TherearemanytypesofSCFsolutionswhihareappliedintherealworldand

widely disussedby aademia.In this paragraphtherange ofexisting in business

areaSCFsolutionsisanalyzedfollowingthelogiofCaniatoet.al(2016)thatSCF

solutionsmaybedivided into twomain groupswhere the rstoneoversthede-

isionsin working apitalomponents(AR,AP, Inventory)with thepartiipation

ofanintermediaryinthispaperweallthese SCFsolutionstraditional,andthe

seondoneisbasedpurelyonollaborationamongSCpartnersthisgroupofSCF

solutionis alledollaborativeone.Thus, theTable 1representsSCF solutionsin

Table 1.RangeofSCFsolutions

Group

SCF

solution

Denition Mainbenets

Finanial

third-

party

involve-

ment

Key re-

searhes

Traditional

Fatoring

Formof

Reeivables

purhase,when

sellersofgoods

selltheirARata

disountto

nane

provider(GSCFF,

2019)

Longerpayment

termsfor buyer

andfasterash

reoveryfor

supplier;

redutionofrisks

andostson

asymmetri

information

Always

Klapper

(2006);

Mian&

Smith

(1992)

Reverse

Fatoring

Ananial

arrangementthat

helpsarmpay

inadvaneitsAP

toitssuppliers

(Zhanetal.,

2018)

Longerpayment

termsfor buyer

andfasterash

reoveryfor

supplier;

redutionofrisks

andostson

asymmetri

information;

lowerostof

nanefor

supplierdueto

buying

rms'redit

rating

Always

Klapper

(2006);

Wuttkeet

al.(2016);

Zhanet

al.(2018)

Inventory

naning

Solutioninwhih

athirdparty

providerbuys

andpossessgoods

froma

manufaturerand

thenresellthem

toustomer

(Homan,2009)

Redutionof

inventorylevelsof

buyerand

supplier,faster

ashreoveryfor

buyerand

supplierforgoods

soldandbought

viathirdparty

provider

Not

neessarily

(logisti

servie

operatoris

possible)

Homan

(2009),

Chen&

Cai

(2011),

Gelsomino

etal.

(2018)

Dynami

disounting

Solution,whih

desribesa

disountsfor

earlypayment:

theearlythe

paymentours,

thehigherthe

amountof

disount

(GSCFF,2019)

RedutionofCost

ofgoodssolddue

todisount

Not

ompulsory

Templar

etal.

(2016);

Collabora-

tive

VMI

A suppliertakes

responsibility

forinventory

management,

replenishment,

monitoring

deisions,

deisionsof

orderquantities

andshippingfor

itsbuyer

Redutionthe

risksassoiated

with

information

asymmetry;

aligning

planning

proedures

(reduing

inventorylevels

forsupplierand

buyer)

No

Walleret

al.(1999)

Consign-

ment

stok

A buyerholds

andmaintains

inventoryofits

supplierwhile

supplierretains

ownershipuntil

inventoryissold

out

Reloationof

inventory,fast

aessto

inventoryfor

buyertofulll

thedemand

No

Valentini

&

Zavanella

(2003)

ForthepurposeofthispaperthefollowingthreeSCFsolutionsarehosen:Fa-

toring, ReverseFatoringand Inventory Finaning.Thelogibehindthehoie is

that thesesolutionsallowto manageallthree CCC omponents(AR,AP andIn-

ventory)ofallthemembersofSCandimprovethose.Moreover,theydonotrequire

highlevelofollaborationwithjointmaterialplanningasitgroupofollaborative

supplyhainnane instrumentsdoes.Atthe sametime,Gelsomino et al.(2019)

desribethesameSCFsolutionsasthemostpopularamongpratitioners.Inaddi-

tion,aordingtoChen(2019),theompaniesfromretailindustryemphasizethat

bothtypesof Fatoring anInventory Finaningare themosteetivesolutionsin

termsofimprovementofworking apitaland partnershiprelationsalongasupply

hain. Inlightontheforegoing,pratialuse ofthehosenSCFsolutionsisgoing

tobedesribedhereafter.

Fatoring and Reverse Fatoring.Themainideaof thesetwoSCFinstru-

ments is to failitate longer payment terms for buyer and shorter period of ash

reeipt for supplier through involvement of nanial intermediary. (Tseng et al.

2018).Thedierenebetweenthoseisharaterizedbyaninitiatorandtypeofol-

lateral.Therefore,Fatoringisthesolutionwhihimpliesthat aountreeivables

ofasupplieraresoldtonanialservieproviderandusedasollateralinanagree-

ment.Thedeisionofimplementationisinitiatedbysupplier.Atthesametime,at

ReverseFatoring ollateralinnanialagreementisbuyer'saountspayableand

in this settings buyeris deisionmaker.Thus, in situation when supplieris small

ormediumrmwhile buyeris morepowerfulthe reversefatoringisanappropri-

atedeision, beausenanial servieproviderusesbuyer'sredit rating, whih is

betterthansupplier'sone,toadopttheSCFsolution.Insteadofpayingtothesup-

plierdiretly,ananialintermediaryprovidesertainamountoffundonbehalfof

thebuyer(Grueter&Wuttke,2019).Next,thebuyerpaysotheloanprinipleto

nanialintermediaryandthesupplierpaystheinterest,whereinterestrateisalu-

touse.WhenonsideringsupplyhainFatoringandReverseFatoringareusedto

workproperlyfordierentstagesofSC,e.g.toimprovesupplier-manufaturerpay-

menttermsReverseFatoringis used,whileformanufaturer-distributorrelations

Fatoring isanappropriatesolution(StrategiTreasurer,2017).

TraditionalmodelofFatoringandReversefatoringtypiallyinludes3mem-

bers:supplier,buyerandnanialinstitution(e.g.bank).Theshemeofbothsolu-

tionsisdemonstratedbyFigure3.Afterbuyermakesanorderandsupplierdelivers

it(steps 1and 2), buyerprovidesthe bankwiththe invoieswhih overdelivery

(step3).Supplierdeidestheamountofdeliverywhihwillbereeivedimmediately

(step 4), in pratieearly paymentmayvary from 10%to 95%of delivery,and it

takes3 days for bank to pay. At the step5 supplieroversthe interest(the rate

dependson buyer'sredit rating and thetime period whih buyerneedsto repay

theloan).Afterthistimeperiodisup,buyerpayoloanprinipletothebank,and

thebankoversrestforpaymentforsupplier(steps6and7).

Fig.3.FatoringandReverseFatoringsheme.Soure:reatedbytheauthor

Nowadays, the vast majority of banks worldwide oers desribed solutions.

Theybenetfrominterestpaymentreeivedforshort-termloansandunderlowest

risksandopportunitiestoattratnewlients.Theonlyrequirementforompanies

is maintenane of eletroni workow; however, there are plenty of platforms in

themarket,whooerthis servie. Aording to Commerial CapitalLLS USA&

CanadaduediligeneostsofFatoring/ReverseFatoringisminimal:itmayvary

from100dollarstoafewthousanddollarsforomplexsolution.

Inventory Finaning.TheideaofaninnovativeformofInventoryFinaning

asSCFsolutionwasintroduedbyHoman(2009)forthersttime.Aninnovative

formimpliesthat logistisservieprovides(LSP)takesresponsibilitiesofnanial

funtion,althoughreentlyinventoryhasbeenasollateralforbankstograntaloan.

Homan(2009)highlights,that themain benet fromthis solutionisadoption of

network perspetive whih helps to improve inventory management within SC;

however, it also aims at pursuing dierent goals of two members of SC (whose

relationsdened byontrats,e.g.supplierandmanufaturerormanufaturerand

distributor) as well as goals of LSP and overome potential onit of interests.

In this regard, suppliertries to sell its inventory to manufaturerand get money

foritasfastaspossiblywhile manufaturerwantstotaketheownership asloser

to the moment of demand ourrene. Atually they both aim at dereasing the

its goal is to maximize protthrough providing alarge numberof servies to its

ustomer(inludingnanialones).Chen&Cai(2011)provedthatthisinnovative

form of Inventory Finaning allows to ahieve higher joint prot of SC, beause

thesolutionallowstoreduethelevelofinventoryonhandofindividualompanies

inludedinSCduetoinreasedturnover,whihhaspositiveimpatonollaborative

ashonversionyle.

Figure4showshow Inventory Finaninganbeimplemented in pratie.The

sheme is based on typial struture of Inventory Finaning adoption oered by

Gelsomino&Steeman(2017)underontrol ofSupplyChainFinaneCommunity.

Fig.4.InventoryFinaningsheme.Soure:reatedbytheauthor

AfterbuyerandsupplierhaveagreedaboutquantitytheydeliverthroughLSP

and pries, supplier produes inventory and sell it to LSP and LSP pays for it

(aordingtoGelsomino&Steeman,typiallyittakesdays2daysafterprodution

totakeinventoryand10daystopay).Itmeansthatsupplierneedstokeepinventory

fortwodaysonitsownandafterthattransferstherightsoflegalownershiptoLSP.

Atthemomentbuyerrealizestheneedofinventoryitanimmediatelybuyitfrom

LSP and has an obligation to pay o in 30 days period. Homan (2009)proved,

that there is no interest for LSP to sell inventory at a higher prie then it buys

it. LSP is rather interested in interest payment whih is alulatedin proportion

to theamountdeliveredthroughLSP. Nowadays, suh SCF solutionasInventory

FinaningisoeredbyanumberofrelevantLSParoundtheglobe,e.g.SwissPost,

DHL,UPS.

3. JointSupply ChainFinane Solutions

Analysis of the existent literaturein the eld of working apital management

in supplyhainand supplyhain nanesolutionsappliability, showsthere isno

expliittoolofjointworkingapitalmanagementaswellasmodelsofsupplyhain

nanesolutionsandtheirappliabilityin supplyhain. Herethemodelsforjoint

working apital management through supply hain nane solutions adoption in

supplyhainwillbedeveloped.

3.1. The Modelof CollaborativeCash ConversionCyle

HomanandKotzab(2010)provedintheresearhthatWCoptimizationofone

member of SC is not beneial for ommon result of whole supply hain. At the

ofjointworkingapitalin SCtheauthorslaimedthatCCCCoptimization liesin

theareaofjointationsandsolutionsofallmembersofahain.Basedonthisidea,

themodelofCCCCistobedeveloped.

Thereafter,forthepurpose ofthisresearhweonsider two-stagesupplyhain

beauseanybilateralrelationsaredenedbytheontratsandamenabletomanage.

TheanalysisofCahon&Lariviere(2005)showasesthatrevenuesharingontrats

seem to be very attrative to oordinate supply hain and inrease joint prot

and aresuitable forany partof supplyhain. Moreover,evideneomes from the

researhof Mortimer (2000),whoestimates aninreasein aggregateprot ofone

hosenindustryas7%duetohangeoftermsoftradetorevenue-sharingontrat.

Aording to Cahon & Lariviere (2005) we are not limited to any part on

supply hain. Thus, type of two-stage SC for this researh may inlude either a

numberof suppliers and onemanufatureror onemanufaturerand anumber of

distributors.Figure5showstheexampleofupstreampartofthetraditionalthree-

stagesupplyhain, whihis presentedbyrelationshipbetweennumeroussuppliers

andonebuyer.TherelationshipisdesribedbyCCCComponents:

DIO ^k _l

^,

DRO ^k _l

and

DP O _l ^k

^{,whereinternalpaymentsbetweenSCpartners}

DRO _l ^k

^and

DP O ^k _l+1

^are

equalduetobeingdenedbyspeiexistingontrat.Apartfromthat,weannot

inueneexternalowssuhas

DRO ¹ ₂

^,

DP O ¹ ₁

^,

DP O ² ₁

^,

DP O ⁿ ₁

^{beausetheydene}

relationshipwithotherorganizationsoutsideonsiderablesupplyhain.

Fig.5.Exampleoftwo-stageSC.Soure:reatedbytheauthor

Aimingatoptimizationofjointworkingapitalobjetivefuntionistotalnan-

ialosts(TFC)onworkingapitalofsupplyhain.Assumingthatthemembersof

asupplyhainareinterestingtomaximizetheirjointprotobjetivefuntionisto

beminimized.WedeneTFCasasumofnanialostsonworkingapitalofeah

memberof supply hain based onthe formula proposed by Viskari et al. (2013).

Thus,objetivefuntionofthemodelofCCCCmaybeexpressedasthefollowing

equation:

T F C = X m

l=1

X n

k=1

F C _l ^k ,

⁽⁷⁾

wherel isthestageofSC,andk isthenumberofompanieswhihisomprisedin

onestage.Theformulaofindividualnanialostsonworkingapitalispresented

bytheequation(2).

Following Homan and Kotzab (2010) CCCC is dened as a sum of CCC of

eahindividualompanyinludedinSC:

CCCC = P m l=1

P n k=1

CCC _l ^k , CCC _l ^k = DIO _l ^k + DRO _l ^k + DP O ^k _l ,

(8)

where

l

^{isthestageofSC,and}

k

^{isthenumberofompanieswhihisomprisedin}

onestage.

Forthepurposeofthisresearhinthemodel

l

^{maytaketwovalues:1or2,aswe}

onsider two-stagesupplyhain, and

k

^{is alwaysequalsto 1,beauseweonsider}

theonlyompanyateahstage.Obviously,themodelanbeenlargedandinlude

moreompaniesatstages;however,ifitworksfortheonlyompanyateahstage,

itanbeeasilyrepliatedbyaddingother partiipants.

Homan and Kotzab (2010) proved that internal payments between two SC

partners do not aet the result of CCCC. Thus, to ensure we analyze bilateral

relationsbetweenexhangepartnerswedenotetheequalityoflengthsofDROand

DPOoftwoexhangepartnersasfollows:

DRO ^k _l = DP O ^k _l+1 .

⁽⁹⁾

Moreover,themodelof CCCC is fousedon managing internal relationsbetween

SCpartners,exploitingpossiblehangeinontrats,whihdenerelationsbetween

them.Therefore,DPOoftheSCmemberattherststageandDROoftheompany

in the downstream ow diretion stage should remain stable after optimization.

Mathematiallyitisexpressedasfollows:

DP O ₁ ^k = DP O ^0k ₁ ,

DRO ₂ ^k = DRO ^0k ₂ .

⁽¹⁰⁾

Referringto what is mentionedabove, weassumethat allthemembers ofsupply

hain are motivatedfor jointations, andtherefore, are interestedin redutionof

anytypeofostsinludingtotalnanialostsonworkingapital.Intheprevious

hapter of the paper it isproved that oordinatingontratsinrease thelevel of

motivationtoboosttotalprotofsupplyhain.Consequently,wesetthefollowing

onstraintmeaning that aimingat total ostson working apital of SC redution

individualnanialostsonworkingapitalremainnoworsethanitwasbeforethe

optimization.Thisisexpressed bytheequation(11).

F C _l ^k ≤ F C _l ^0k .

⁽¹¹⁾

InresponsetotheoretialreviewweareawareofassoiationbetweenWCandprof-

itabilityandtheproblemofliquidity-protabilitytradeo.Therefore,whilemanag-

ingworkingapital,speiboundarieswithinitsvaluemayvaryshouldbesetup

inordertoensureompany'seetivenessandsolvenyatthesametime(Garanina

&Petrova,2015).Inthisregard,wesettheonstraintwhihletsCCCofindividual

ompanyinsupplyhainhangewithin predenedstabilityinterval:

CCC low ≤ CCC _l ^k ≤ CCC up .

⁽¹²⁾

Table 2.ParametersofthemodelofCCCC

Modelelement Notation Desription

ObjetivefuntionTFC

Total nanial osts onworking apital for supply

hain

Indexes

l stageofsupplyhain

k ompanyatertainstageofsupplyhain

Variables

DIO ^k _l

^{Days of inventory} outstanding for ompany k at stagel

DRO ^k _l

^{Days of reeivables} outstanding for ompany k at stagel

DP O ^k _l

^{Days of aountspayable} outstanding for ompany k atstagel

Parameters

CCC l ^k

^{ashonversionyleofompanyk atstagel}

CCC low ; CCC up

predened stability intervalforompanyk at stage

l

Inventory

k l

year-endamountofinventoryofompanyk atstage

l

AR ^k _l

^{year-endamount ofaountsreeivableofompany}

k atstagel

AP _l ^k

^{year-endamountofaounts payable ofompanyk}

atstagel

COGS ^k l

year-endamountofostofgoodssoldofompanyk

atstagel

Revenue

k

l

^{year-endamountofrevenueofompanyk atstagel}

c ^k _l

^{ostofapitalofompanyk atstagel}

F C l ^k

nanial osts onworking apitalof ompanyk at

stagel

F C l ^0k

nanial osts onworking apitalof ompanyk at

stagelbeforeoptimization

W C l ^k

^{amountofworkingapitalofompanyk atstagel}

Table2presentstheelementsofthemodelofollaborativeashonversionyle.

Thus, the optimization model of CCCC works as follows: to minimize total

nanial osts on working apital (7) by hanging variables (Table 2) under the

onstraints9 12. As a result of modeling optimal values of CCCC omponents

arefoundtoahieveminimaltotalnanialostsonworkingapitalunderspei

onstraintsof liquidity forone-year planningperiod. Overall,themodelallows to

estimateiftheoptimizationispossibleandtoanalyzewhihjointationsinterms

of managing omponents of WC in supply hain are to take in order to ahieve

minimaltotalsupplyhainostsonworkingapital.

Nevertheless,themodeldoesnotprovideanyapproahestoahievetheresults,

whihitgives.Basially,itdemonstratesonlyoptimalollaborativeashonversion

yle omponents,therefore, may be used predominantly asanalytial tool. As a

onsequene,thereisaneessitytodevelopfurthermodelswhiharetoshowlear

waystoahievedesirableresultsintermsofjointworkingapitalmanagement.For

this reason, based on the results of theoretial review in the rst hapter supply

3.2. The Modelsof SupplyChain FinaneSolutions

BasedontheshemesofSCFsolutionspratialusethemodelsofhosenSCF

solutions are to be developed. In this regard, these models are to show whether

adoption of a partiular SCF solution allows to nd optimal solution aiming at

minimizationoftotalsupplyhainnanialostsonworkingapitalandhowthese

minimalostsmaybeahievedprovidingtheonditionsofSCFsolutionadoption.

Model of Fatoring/Reverse Fatoring. Generally, the model of Fator-

ing/ReverseFatoringisbasedonthemodelofCCCC,however,weassumeadding

hereoneofSCFsolutions.Itimpliesadditionalostsimposingandhangesofsome

variables due to inuene of solution adoption. Therefore, we develop the model

of Fatoring/Reverse Fatoring onsidering two-stage supply hain as previously.

Although for this model the objetivefuntion basially remains thesame it is

minimization of TFC, this value is to inlude new type of osts assoiated with

Fatoring orReverse Fatoring use. It is expressed in the interest rate (r),whih

is dependent on buyer's redit rating, and the time period whih buyer needs to

repay theloan.Equation 13represents theformula forosts onFatoring/Revers

Fatoring alulationbasedonAR ofsupplier:

F C F/RF = DP O ^k _l+1 × r

365 × AR _l ^0k × x,

⁽¹³⁾

where

r

^{is interestrate,and}

x

^{istheshareofusingFatoring orReversefatoring,}

whih may take values from 0,1 to 0,95 aording to the sheme of its pratial

use(see Fig.3). Inother words,

x

^{is ashare ofearly paymentwhihsuppliergets}

from bank immediately (in three days after it reeived invoies). Considering it

theobjetivefuntionforthemodelofFatoringandReverseFatoringhangesas

follows:

T F C = X m

l=1

X n

k=1

F C _l ^k + F C F/RF .

⁽¹⁴⁾

From the Table1 it is aquainted that both Fatoring and Reverse fatoring are

toahievelongerpaymenttermsforbuyerandfasterreoveryofashforsupplier,

inueningdiretlyDRO

l

^{byseletingtheamountofearlypaymentandDPO}

l+1

^by

seletingnewappropriatelengthofpaymenttermtoimprovejointworkingapital.

Therefore,wedenotethatDRO

l

^{isnowthefuntionofDRO}

l 0

,DPO

l+1

^andx:

DRO ^k _l = x × 3 + (1 − x) × DP O ^k _l+1 ,

⁽¹⁵⁾

wherex

∈

[0,1;0,95℄.

Table3presentstheelementsofthemodelofollaborativeashonversionyle

suhasobjetivefuntion,variables,andparametersprovidingthelistofnotations.

Thus,theoptimizationmodelofFatoringorReverseFatoringworksasfollows:

tominimize totalsupply hainnanialostsonworking apital(14)byhanging

twovariables(Table3):shareoftheearlypaymentfrombank

x

^{andlengthofpay-}

ment term

DP O l+1

^{under the onstraints(11) and (12). As aresult of modeling}

weexpettogetoptimalonditionsofadoption ofsuhaSCFsolutionasFator-

ing orReverse Fatoring to ahieveminimal total supplyhain nanial ostson

workingapitalunderspeionstraintsofliquidityforone-yearplanningperiod.

Inontrasttopreviousmodeldevelopedintheresearh,apartfromoptimalCCCC

Fatoring/Reverse Fatoring demonstrates spei onditions of SCF instrument

use,whih allowtoahievejointworkingapitalimprovement.

Table3.ParametersofthemodelofFatoring/ReverseFatoring

Modelelement Notation Desription

ObjetivefuntionTFC

total nanial osts on working apital for supply

hain (inludingosts ofFatoring/Reverse Fator-

ingAdoption)

Indexes

l stageofsupplyhain

k ompanyatertainstageofsupplyhain

Variables

x

^{shareoftheearlypaymentfrombanktosupplier}

P lengthofpaymentterm

Parameters

CCC _l ^k

^{ashonversionyleofompanyk atstagel}

CCC low ; CCC up

predened stability intervalforompanyk at stage

l

Inventory

k l

year-endamountofinventoryofompanyk atstage

l

AR ^k _l

^{year-endamount ofaountsreeivableofompany}

k atstagel

AP _l ^k

^{year-endamountofaounts payable ofompanyk}

atstagel

COGS ^k _l

^{year-endamountofostofgoodssoldofompanyk}

atstagel

Revenue

k

l

^{year-endamountofrevenueofompanyk atstagel}

c ^k _l

^{ostofapitalofompanyk atstagel}

F C l ^k

nanial osts onworking apitalof ompanyk at

stagel

F C l ^{0 k}

nanial osts onworking apitalof ompanyk at

stagelbeforeoptimization

W C _l ^k

^{amountofworkingapitalofompanyk atstagel}

r interestratefor Fatoring/ReverseFatoringuse

DRO ^k l

Days of reeivables outstanding for ompany k at

stagel

DIO ^k l

Days of inventory outstanding for ompany k at

stagel

DP O ^k l

Days of aountspayable outstanding for ompany

k atstagel

Thus,theoptimizationmodelofFatoringorReverseFatoringworksasfollows:

tominimizetotalsupplyhainnanialostsonworkingapital (14)byhanging

two variables (Table 3): share of the early payment from bank

x

^{and length of}

paymentterm

DP O l+1

^{undertheonstraints(11)and(12).Asaresultofmodeling}

weexpettogetoptimalonditionsofadoptionsuhaSCFsolutionasFatoringor

ReverseFatoringtoahieveminimaltotalsupplyhainnanialostsonworking

apitalunderspeionstraintsofliquidityforone-yearplanningperiod.

ModelofInventoryFinaning.Followingthesamelogiasitwaswhilemod-

elingFatoring/Reverse Fatoring andin alignment withthe sheme ofpratial

LikeanySCFsolutionadoption ofInventoryFinaningimpliesadditionalosts

forsupplyhainmembersthat shouldbepaid tointermediary whih providesthe

servie. Inthis aseit is logistis servieprovider (LSP). Homan (2009) dened

thepremiumwhihLSPreeivesprovingtheservieofInventoryFinaningasthe

dierene between the value of the naned goods and the present value of the

naned inventory. Based on this denition we determine osts assoiated with

SCFsolutionInventoryFinaninguse.Itisdemonstratedbyequation16:

F C IF = (1 − x) ×

^{Inventorytotal}

− (1 − y) ×

^{Inventorytotal}

(1 + i) ^t ,

⁽¹⁶⁾

where

i

^{is interest rate dened by LSP,}

(1 − y)

^{is a share of inventory amount}

naned, y

∈ [0; 1]

^{, and}

t

^{is durationofthe ontratin periods. Thus,the ostof}

this SCFsolutiondepends ontheamountofinventory todeliverviaLSPandthe

interest rate, whih is determined by. Therefore, inluding this type of osts the

objetivefuntionforthemodelofInventoryFinaninghangesasfollows:

T F C = X m

l=1

X n

k=1

F C _l ^k + F C IF ,

⁽¹⁷⁾

Sine Inventory Finaning is the solutionsof higheromplexityit aets four

omponentsof CCCC simultaneously:

DRO l

^,

DP O l+1

^,

DIO l

^{, and}

DIO l+1

^{. A-}

ordingtoGelsomino&Steeman(2017),typiallyforLSPittakesdays2daysafter

produtionto takeinventoryand10 daysto pay.Basedonthis shemewedenote

that

DIO l

^{is nowthefuntion of}

DIO 0l

^and

y

^{, where}

y

^{is theshare of inventory}

amountwhihisnotnanedanddeliveredasitis(fromsuppliertobuyerdiretly);

while

DRO l

^{isthefuntionof}

DIO 0l

^and

x

^{.TheseCCCComponentsareexpressed}

byequations(18)and(19)respetively.

DIO ^k _l = y × DIO _l ^0k + (1 − y) × 2,

⁽¹⁸⁾

DRO ^k _l = y × DRO _l ^0k + (1 − y) × 10.

⁽¹⁹⁾

Homan(2009)laimedthat buyeraims to takeinventoryfrom LSPasloser

to demand ourrene as possible in order to keep it as shorter as possible. To

resolvetheonitofinterestsbetweenpartnersinsupplyhainisanultimategoal

of Inventory Finaning as SCF solution. Although Gelsomino & Steeman (2017)

statethattheinventoryobtainedfromLSPshould bekeptbybuyernomorethan

oneday,forthemodelweassumeatleasttwodaysbeforeinventoryissoldfurther

downstream along supply hain. As for payment terms, we follow Gelsomino &

Steeman(2017)andassumethatbuyerhastopayoitsAountsPayabletoLSP

in 30 days. Thus,

DIO l+1

^and

DP O l+1

^{are denoted as equations (20) and (21)}

respetively:

DIO ^k _l+1 = y × DIO _l+1 ^0k + (1 − y) × 2,

⁽²⁰⁾

DP O ^k _l+1 = y × DP O _l+1 ^0k + (1 − y) × 30.

⁽²¹⁾

Table4presentstheelementsofthemodelofollaborativeashonversionyle.

Thus,theoptimizationmodelofInventoryFinaningworksasfollows:tomini-

Table 4.ParametersofthemodelofInventoryFinaning

Modelelement Notation Desription

ObjetivefuntionTFC

total nanial osts on working apital for supply

hain(inludingostsofInventoryFinaningadop-

tion)

Indexes

l stageofsupplyhain

k ompanyatertainstageofsupplyhain

Variables

y

^{shareofinventoryamountwhihisnotnanedand}

deliveredasitis

Parameters

CCC _l ^k

^{ashonversionyleofompanyk atstagel}

CCC low ; CCC up

predened stability intervalforompanyk at stage

l

Inventory

k l

year-endamountofinventoryofompanyk atstage

l

AR ^k _l

^{year-endamount ofaountsreeivableofompany}

k atstagel

AP _l ^k

^{year-endamountofaounts payable ofompanyk}

atstagel

COGS ^k _l

^{year-endamountofostofgoodssoldofompanyk}

atstagel

Revenue

k

l

^{year-endamountofrevenueofompanyk atstagel}

c ^k l

^{ostofapitalofompanyk atstagel}

F C _l ^k

^{nanial osts onworking apitalof ompanyk at}

stagel

F C l ^{0 k}

nanial osts onworking apitalof ompanyk at

stagelbeforeoptimization

W C _l ^k

^{amountofworkingapitalofompanyk atstagel}

i interestratefor InventoryFinaninguse

DRO ^k _l

^{Days of reeivables} outstanding for ompany k at stagel

DIO ^k _l

^{Days of inventory} outstanding for ompany k at stagel

DP O ^k _l

^{Days of aountspayable} outstanding for ompany k atstagel

variable

y

^{(4)undertheonstraints11and12.Asaresultofmodelingweexpetto}

getoptimalonditionsof adoptionsuhaSCFsolutionasInventoryFinaningto

ahieveminimaltotalsupplyhainnanialostsonworkingapitalunderspei

onstraintsofliquidityforone-yearplanningperiod.

3.3. JointWorkingCapital Optimizationin SC

This model ombines the model of CCCC and both models of SCFsolutions:

Fatoring/ReverseFatoringandInventoryFinaning.Eventhoughforthepurpose

ofmodelingFatoringandReverseFatoringarethesamein termsofinueneon

CCCC omponents, theyareused for dierentparts of supplyhain. Thus, ifthe

objet of analysis is the upstream partof supply hain whih onerns suppliers

foal ompany (manufaturer orwholesaler), Reverse Fatoring is used; if it is

tributorrelations,Fatoringisanappropriatesolution.Atthesametime,Inventory

Finaningmaybeapplied tobothpartsofsupplyhain.

Forthemodelofjointworkingapitalobjetivefuntionisthesame:totalsupply

hainnanialostsonworkingapital;butnowitontainsasumofnanialosts

on working apital of eah member of supply hain as well as osts assoiated

with the use of two SCF solutions simultaneously (eq. 13 and 16 respetively):

Fatoring/ReverseFatoringandInventoryFinaning:

T F C = X m

l=1

X n

k=1

F C _l ^k + F C F/RF + F C IF .

⁽²¹⁾

Adoption of two SCF solutions simultaneously aets four CCCC omponents:

DRO l

^,

DP O l+1

^,

DIO l

^{, and}

DIO l+1

^{. Although}

DIO l

^,and

DIO l+1

^{are expressed}

here exatly asthey were in model of Inventory Finaning(equations 18 and 19

respetively),beause theyare under the onlySCF solution,

DRO l

^and

DP O l+1

ombinetheinueneoftwosolutions.BeingaetedbythesharesofusingtwoSCF

instruments and onditions whih these instruments require,

DRO l

^and

DP O l+1

areexpressedasthefollowingequations:

DRO ^k _l = 3 × x + DP O ^k _l+1 × (1 − x)

× y + + y × DRO ^0k _l + (1 − y) × 10

× (1 − y) , DP O _l+1 ^k = y × DP O ^0k _l+1 + (1 − y) × 30

× (1 − y)) + (P × y) ,

(22)

where

P

^new appropriate length of payment term when using Fatoring/Reverse Fatoring.

Thus,theoptimizationmodelofjointworkingapitalworksasfollows:tomin-

imize totalsupplyhainnanial ostsonworkingapital (21)by hangingthree

variables: x, y, and P (Table 5) under the onstraints 11 and 12. As a result of

modeling weexpet to get optimalstrategy of joint working apitalmanagement

foratwo-stagesupplyhainwhihontainstheonditionsofusing twoSCFsolu-

tionssimultaneously(Fatoring/ReverseFatoring and Inventory Finaning) aim-

ingat minimaltotalsupplyhainnanialostsonworkingapitalunder spei

onstraintsof liquidity forone-yearplanning period. As opposed to the model of

CCCC,themodelof jointworkingapitaloptimizationrepresentsnotsimplyana-

lytial toolbut provideslearapproahesto improvejointworkingapital insup-

ply hain. Moreover,what dierentiatesthe model from ones of SCFsolutions is

simultaneousinueneofFatoring/ReverseFatoringandInventoryFinaningon

CCCComponents.It enhanestheprospetsofahievableandrealistiresults.

3.4. Joint WorkingCapital Improvementin SC

Todayompaniesstarttorealizebenetswhih theyanget throughoopera-

tionwith supplyhain partners andnanial intermediarieswhen managingtheir

nanialowsandtostrengthennanialpositionindoingso(deBoeretal.,2015).

Itisimportanttoworkinooperationmakingonessionstomeetdierentinterests

ofpartners.Hene,SCFsolutionspose atoolto resolveoniting nanialinter-

ests of partners improving overall nanial performane of supplyhain (Caniato

etal.,2019).Thedemonstrativeexamplesofsuhonitingnanialinterestsare

paymenttermsandinventoryholding.Whereasbuyerwantstoextendtheperiodto

pay,supplierisinterestinginfasterashreovery;asforinventoryholding,supplier

Table 5.ParametersofthemodelofJointWCoptimization

Modelelement

4

Notation Desription

ObjetivefuntionTFC

total nanial osts on working apital for supply

hain (inludingosts ofFatoring/Reverse Fator-

ingandInventoryFinaningadoption)

Indexes

l stageofsupplyhain

k ompanyatertainstageofsupplyhain

Variables

x

^{shareoftheearlypaymentfrombanktosupplier}

y

^{shareofinventoryamountwhihisnotnanedand}

deliveredasitis

P lengthofpaymentterm

Parameters

CCC l ^k

^{ashonversionyleofompanyk atstagel}

CCC low ; CCC up

predened stability intervalforompanyk at stage

l

Inventory

k l

year-endamountofinventoryofompanyk atstage

l

AR ^k l

year-endamount ofaountsreeivableofompany

k atstagel

AP l ^k

year-endamountofaounts payable ofompanyk

atstagel

COGS ^k l

year-endamountofostofgoodssoldofompanyk

atstagel

Revenue

k

l

^{year-endamountofrevenueofompanyk atstagel}

c ^k l

^{ostofapitalofompanyk atstagel}

F C _l ^k

^{nanial osts onworking apitalof ompanyk at}

stagel

F C _l ^{0 k}

^{nanial osts onworking apitalof ompanyk at}

stagelbeforeoptimization

W C l ^k

^{amountofworkingapitalofompanyk atstagel}

i interestratefor InventoryFinaninguse

r interestratefor Fatoring/ReverseFatoringuse

DRO ^k _l

^{Days of reeivables} outstanding for ompany k at stagel

DIO ^k l

Days of inventory outstanding for ompany k at

stagel

DP O ^k l

Days of aountspayable outstanding for ompany

k atstagel

to obtain it as late as possiblein order to keep it short time before the demand

ourrene.Thesetwomain onitsmaybeompromisedthroughSCF solutions

adoption asthey aim foramountof workingapital redutionof eah memberof

supplyhainwhileoptimizingtheoverallsupplyhainnanialperformane(Ho-

man,2018).

Aimingto overthegap ofmanagerialsideof SCFsolutionsadoption thispa-

peristo providethealgorithm for jointworkingapital improvementin asupply

hainbasedontheoptimizationmodels.Thus,fourmodelsmaybeusedtoanalyze

fore,the algorithmof joint working apitalimprovement may be expressedin the

followingway.

Therststepisto analyzewhether theoptimizationunder spei onstraints

is possiblefor a partiular supply hain. For this purpose the model of CCCC is

proposed to be used.If theoptimizationis possible,it showsoptimalWCompo-

nentsforminimal totalsupplyhain nanialostson WC underthe onstraints.

Althoughalltheonstraintsarespeiedaboveinthetext(eq.912),itisworth

emphasizingthat themodelprovidestheoptimalsolutionin aordanewith two

main requirements: rst, CCC stabilityinterval, whih allowsto solveliquidity

protability tradeo in away that eah member of SC ahieves greater liquidity

individuallyfallinginoptimumintervalsofCCC,seondly,nanialostsonWCof

eahmemberofahainwhihshouldbenotworsethantheywerebeforeoptimiza-

tion.Thus,basedontheoptimalsolution,whihisprovidedbythemodelofCCCC,

thedeisionmakeranonludeaboutationstomanageWComponentsinorder

toahievegreaternanialperformane.Moreover,he/sheanadditionallyrealize

whether the optimalsolution isself-maintainedorit implies unrealistihange of

WC omponents. Ifthe latter isa matter offat, itis reasonableto move onthe

nextstep.

FortheseondstepthemodelsofSCFinstrumentsarereommendedtobeap-

plied. Speially, when understanding that ahievement of minimal total supply

hain osts on working apital orresponds to providing unreal onditions forthe

membersofsupplyhain(e.g.abandoningoftheinventoryoritssigniantredu-

tion,extendedortooshortpaymenttermswhih arenotbeneial forsupplieror

buyerrespetively),itisreommendedtoadoptSCFsolutions.Thus,themodelof

Fatoring/ReverseFatoringandthemodelofInventoryFinaningareproposedfor

theimprovingjointWC.Inthisregard,bothmodelsshowoptimalWComponents

forminimaltotalsupplyhainnanialostsonWCaswellasoptimalonditions

ofthesolution'suseundertheonstraintsiftheoptimizationispossible.Basially,

twoonstraintsare used for the model (eq. 11and 12),whih onern individual

osts on WC maintenane and liquidity - protability tradeo. Even though the

former(eq.11)isonsideredinthemodelthereareadditionalostsassoiatedwith

SCFsolutionusewhihshouldbetakenintoaountwhenalulatingtotalsupply

hain ostson WC.It means that in aseof supplyhainpartners'willingness to

ahievegreater liquidity falling in optimum CCC intervalsthey are ready to pay

additionally.It notneessarilyimpliesinrease oftotalnanial ostsonWC but

it should be ounted. After the analysis of the results provided by the models, a

deisionmakeraneither staywith theadoption of that instrumentwhih model

demonstratesbetterresultsforhim/herortrytoanalyzeanotheralternativewhih

isadoption oftwoSCFsolutionssimultaneously. Ifthelatteris worthwhile orthe

optimizationisimpossibleinanyofthemodels,itisreasonabletomoveonthenext

step.

Thethirdsteponernsjointworkingapitalimprovementthroughtheadoption

oftherangeofSCFsolutions:Fatoring/ReverseFatoringandInventoryFinaning

inpartiular.ThemodelofjointworkingapitaloptimizationprovidesoptimalWC

omponentsforminimaltotalsupplyhainnanialostsonWCaswellasoptimal

onditionsofthesolutionsuseundertheonstraintsiftheoptimizationispossible.

Based on the results obtained from the model a deision maker an see how it

is possible to minimize total nanial osts on WC. Basially, the model shows