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Understanding Supply Chain Finance Adoption Through System Dynamics Eindhoven University of Technology MASTER Understanding supply chain finance market dynamics through system dynamics modelling implications for financial service providers Dello Iacono, U. Award date: 2012 Link to publication Disclaimer This document contains a student thesis (bachelor's or master's), as authored by a student at Eindhoven University of Technology. Student theses are made available in the TU/e repository upon obtaining the required degree. The grade received is not published on the document as presented in the repository. The required complexity or quality of research of student theses may vary by program, and the required minimum study period may vary in duration. General rights Copyright and moral rights for the publications made accessible in the public portal are retained by the authors and/or other copyright owners and it is a condition of accessing publications that users recognise and abide by the legal requirements associated with these rights. • Users may download and print one copy of any publication from the public portal for the purpose of private study or research. • You may not further distribute the material or use it for any profit-making activity or commercial gain Understanding Supply Chain Finance market dynamics through System Dynamics modelling: Implications for financial service providers. by U. Dello Iacono TUE. School of Industrial Engineering. Series Master Theses Operations Management and Logistics Subject headings: Supply Chain Finance, System Dynamics, Financial Service Providers. Understanding Supply Chain Finance market dynamics through System Dynamics modelling: Implications for financial service providers. Umberto Dello Iacono © 2012 U. Dello Iacono This document is provided for research purposes only. It is not a representation of any company or industry. This document is published with the understanding that its content is copyrighted and that the ideas, conceptual approaches and techniques expressed in it are the intellectual property of U. Dello Iacono. This report, or any portion of the report, may not be reproduced, distributed or published by any recipient for any purpose without prior written permission of U. Dello Iacono. Abstract Research on Supply Chain Finance (SCF) traditionally looks from the perspective of the buyer and suppliers that participate in the arrangement. This study covers the arrangement from another participant’s perspective that is often overlooked; the financial service provider who funds and implements the arrangement in buyer-centric supply chains. The aim is to construct a theoretical framework and simulation model that represent the context of SCF solutions and the behaviour within this system for financial service providers. The type of SCF solution that is used to address this topic is a Reverse Factoring scheme with a technical platform. A review on the SCF literature has identified several market factors that impact the adoption process of SCF solutions. These market factors were the main input of a simulation model with the System Dynamics methodology — an approach to policy analysis and design. Key market drivers such as market competition, interest rate differentials, receivables volumes and supply chain working capital goals were combined to simulate existing market behaviour. As it turns out, SCF solutions can be very attractive for all participants but require specific market conditions in order for the participants to fully reap the benefits. By highlighting several SCF market dynamics, a basic understanding from this explorative study has been gained on how several factors interact and lead to certain market outcomes in the SCF market. Finally, the simulation model also demonstrated its versatility as a forecast tool and policy tool; to assess potential markets and to gauge the impact of business actions for a financial service provider, respectively. – iii– Summary In light of the current trend of globalization and the lengthening of supply chains, new financial products are required to support the ‘financial supply chain’. This demand has led to the development of Supply Chain Finance (SCF) solutions — arrangements where favourable financing options in supply chains are introduced to achieve mutual benefits for all supply chain participants. The SCF solution that is analysed is Reverse Factoring with a technical platform, where in a buyer-centric supply chain, the buyer accommodates (key) supplier in obtaining liquidity through a third-party. This third party is s financial service provider (FSP) who funds and implements the SCF arrangements for the supply chain. Given that current SCF research is primarily focused on buyers and suppliers in the SCF arrangement, this study looks at the arrangement from a FSP’s point of view. The research question is: What market dynamics impact the SCF market for financial service providers? This research question has been broken down into the following research objectives: 1. Identify specific market factors that shape the adoption process of SCF solutions in (emerging) markets. 2. Distinguish relationships between market factors that influence the adoption of SCF solutions in (prospective) markets. The research question is explanatory in nature and aims to provide insight into the market dynamics of SCF. This will contribute to academic literature on SCF adoption processes from a perspective that is often overlooked. Existing research seems to indicate that there are several challenges for all SCF actors in order for SCF solutions to become widely adopted. Moreover, there is a paucity of prescriptive models on how to implement SCF arrangements. Ideally, these models should focus on the informational and organizational prerequisites of SCF arrangements — soft factors that are difficult to quantify but are highly critical drivers for the adoption of SCF in supply chains. Based on this research gap, the System Dynamics (SD) methodology has been selected. With this approach it is possible to capture the dynamic interaction of (soft) market factors that impact the SCF market for FSPs. Therefore, in accordance the SD methodology, a system boundary was defined; a conceptual model was created and the model was specified in a simulation model. This simulation model was continuously verified, validated and tested before experiments were performed and the strategic actions were defined, which concludes the iterative cycle of a SD study. Conceptually, the model is based on a SCF life-cycle that shows the sequential stages through which SCF arrangements evolves from a FSP’s perspective: –v– SCF market dynamics through SD modelling U. Dello Iacono 1. Market potential: The SCF market potential represents potential buyer-centric supply chains that would benefit and (technically) qualify for a SCF solution. 2. Implementation stage: Buyers (and their supplier base) that have agreed to participate in a SCF arrangement; have selected the FSP; and are now in the process of being on-boarded in the FSP’s SCF program. 3. Portfolio management stage: The SCF arrangement has been implemented successfully such that the supply chain can make use of the SCF arrangement. The market is defined as a set of buyer-centric supply chains that is capable of running SCF programs and shares similar external conditions (interest rates, payment terms, operational implementation constraints) from the FSP’s perspective. This can be a geographic region or a particular industry where similar conditions are present to launch SCF programs. During this life cycle, several external market factors such as market competition, interest rate differentials, receivables volumes and supply chain working capital goals affect the SCF arrangements that are going through several stages of development The FSP is able to assess the market outlook and performance through key indicators such as; market share, profitability and supply chain benefits for buyers and suppliers. Several reinforcing loops are also presented that are believed to impact subsequent stages in the SCF lifecycle. The track record of banking partners has been indicated as important driver why buyers select particular FSPs to implement a SCF arrangement. The model assumes this to hold by including reinforcing loops, where the principal factor that drives feedback loops of a system the FSP’s track record in a specific market for SCF arrangements. Aside as a marketing vehicle to attract new buyers, a FSP’s track record is believed to produce learning effects for the FSP such that future SCF arrangement can be offered more effectively and efficiently — reduced operational complexity will also drive down implementation costs, making future propositions more attractive for the FSP. The direct benefit for all buyer, suppliers and FSP are based on the quantifiable financial benefits. These benefits are calculated with commonly used working capital equations and funding costs. The buyer’s primary direct benefit is the unlocked working capital in the supply chain, while supplier’s direct benefits also include funding costs savings from selling its receivables through the arrangement. From the model’s generated output, a FSP is able to gain a better understanding of how external influences might impact the market outlook of its (prospective) SCF product. The following results were found: Limited to moderate market competition analysis show that market competition should not impede a FSP from generating a positive return in a SCF market where market competition is likely to emerge. The main area
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