Margarita Protopappa-Sieke

A review of trade credit literature: Opportunities for research in operations

Trade credit arises when a buyer delays payment for purchased goods or services. Its nature has predominantly been an area of inquiry for researchers from the disciplines of finance, marketing, and economics but it has received relatively little attention in other domains. In our article, we provide an integrative review of the existing literature and discuss conflicting study outcomes. We organize the relevant literature into seven areas of inquiry and analyze four in detail: trade credit motives, order quantity decisions, credit term decisions, and settlement period decisions. Additionally, we derive a detailed agenda for future research in these areas.

Invited ReviewA review of trade credit literature: Opportunities for research in operations

Trade credit arises when a buyer delays payment for purchased goods or services. Its nature has predominantly been an area of inquiry for researchers from the disciplines of finance, marketing, and economics but it has received relatively little attention in other domains. In our article, we provide an integrative review of the existing literature and discuss conflicting study outcomes. We organize the relevant literature into seven areas of inquiry and analyze four in detail: trade credit motives, order quantity decisions, credit term decisions, and settlement period decisions. Additionally, we derive a detailed agenda for future research in these areas.

Interrelating Operational and Financial Performance Measurements in Inventory Control

Financial supply chain management and working capital management are increasingly receiving attention as important avenues to increase profitability in supply chains. By actively managing payment terms and working capital requirements, managers can influence financial performance and achieve significant cost savings. However, measures to improve financial performance implicitly restrict and influence operational performance. In our research we elaborate on the benefits of equally considering both operational and financial aspects in decision-making for the physical and financial supply chain. We develop a mathematical model that determines the optimal purchasing order quantity under working capital restrictions and payment delays. We analyze the trade-offs between the most commonly used financial and operational measurements, such as service level, return on investment, profit margin and inventory level. Our results demonstrate the significance of payment delays: Increases/decreases in the upstream/downstream payment delays favor the systems operations by decreasing operational costs. Moreover increases in the working capital employed in the system decrease the total operational cost, increase the total financial cost and lower the return on working capital investment.

Interrelating operational and financial performance measurements in a multiproduct inventory system

Financial supply chain management and working capital management are increasingly under the spotlight as effective approaches to optimising working capital levels and directing cash flows. Especially in a multiproduct environment, efficient working capital allocation can boost company performance, achieve significant cost savings and demonstrate risk-pooling benefits. In this paper, we focus on the interrelation of working capital and stocking decisions for functional, innovative and heterogeneous product portfolios. We analyse the effect of demand correlation, lead time, payment delays, portfolio sizes, and service level constraints for multiproduct portfolios. Due to the dynamic nature of working capital, we resort to simulation in order to derive managerial insights. Our results attest the importance of payment delays on the profitability of a company. In addition, we demonstrate risk-pooling benefits from a financial perspective.

Optimal two-period inventory allocation under multiple service level contracts

Optimal inventory allocation policies have a significant impact on profits in the retail industry. A manufacturer ships products to the retailers’ stores where the end customers buy the product during the selling season. It has been put forward that it is beneficial for the manufacturer to reserve a certain fraction of the inventory for a second replenishment. Then the manufacturer can replenish the retailers’ inventories optimally and can take advantage of the risk pooling effect. In practice, retailers require a certain availability of the product throughout the selling season. Supply contracts are used to coordinate the delivery of products. Under such a contract, the manufacturer agrees to achieve a certain service level and to pay a financial penalty if she misses it. We analyze how a manufacturer responds to a service level contract if she wants to minimize her expected costs. We develop an allocation strategy for the multiple retailer case and find that our results allow for a better understanding of the effect of service level contracts on manufacturers and retailers.

Single product, finite horizon, periodic review inventory model with working capital requirements and short-term debt

In this paper, we build on a single product, finite horizon, periodic review inventory management setting and include key financial aspects such as working capital constraints, payment delays and multiple sources of financing. We numerically solve for the optimal working capital target and the order-up-to level using an embedded Nelder and Mead optimization, and we perform sensitivity analysis on cash flows and short-term debt levels. Our numerical experiments show that when access to short-term debt is granted, the expected cash flows are indeed fairly insensitive to varying short-term debt premiums. However, when short-term debt becomes prohibitive or when downstream payment delays increase, the required working capital target inflates rapidly.

Benefits of working capital sharing in supply chains

Supply chain finance and working capital management are important avenues to reduce supply chain costs. Small suppliers may not have sufficient working capital to finance their operations and efficiently supply their customers. We develop a model that captures the fundamental aspects of financial and operational planning in a two-stage supply chain, with both strong and weak members. A strong member can negotiate for more favorable financing rates, more advantageous payment terms, and shorter lead times than a weaker member. We investigate two working capital allocation scenarios. In the dedicated working capital allocation scenario, the members of the supply chain each have their own working capital. In the joint working capital allocation scenario, the members of the supply chain have a joint pool of working capital. Our results demonstrate significant benefits when the members of the supply chain share the working capital. We also show that extending payment delays to a supplier upstream results in higher overall supply chain costs.

How do financial constraints and financing costs affect inventories? An empirical supply chain perspective

Purpose The purpose of this paper is to identify the interplay between a firm’s financial situation and its inventory ownership in a single-firm and a two-firm perspective. Design/methodology/approach The analysis uses different secondary data sources to quantify the effect of both financial constraints and cost of capital on inventory holdings of public US firms. The authors first adopt a single-firm perspective and analyze whether financial constraints and cost of capital do generally affect the amount of inventory held. Next, the authors adopt a two-firm perspective and analyze the inventory ownership in customer-supplier relationships. Findings Inventory levels are affected by financial constraints and cost of capital. Results indicate that higher costs of capital are weakly associated with lower inventories. However, contrary to the authors’ expectations, firms that are less financially constrained hold less inventories than firms that are more financially constrained. Finally, the authors find that customers hold the larger fraction of supply chain inventory in supplier-customer dyads. Practical implications The authors’ results indicate that financial considerations generally play a role in inventory management. However, inventory holdings seem to be influenced only slightly by financing costs and inventory holdings between supplier and customer seem to be less than optimal from a financial perspective. Considering those financial aspects can lead to relevant financial advantages. Originality/value In contrast to other recent research, the authors study how the financial situation of a firm affects its inventory levels (not vice versa) and also consider inventories from a two-firm perspective.

The Supply Chain Segmentation Journey of Volvo CE

Volvo Construction Equipment (Volvo CE) is one of the world’s largest manufacturers of excavators, road development machines, and compact construction equipment. It generates annual global net sales of approximately 53 billion Swedish kronor (SEK) (around €5.67 billion) and offers its products and services in more than 125 countries through proprietary or independent dealerships. It is recognized as a premium, high quality player and is ranked third in a global comparison with approximately 5% market share. Product innovations and strategic acquisitions made Volvo CE a major player in the construction industry, with a comprehensive product portfolio operated under the three brands Volvo, SDLG, and Terex Trucks (the latter newly acquired in 2014). In this chapter we discuss the supply chain segmentation journey of Volvo CE.