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Improving Supply Chain Profit Through Reverse Factoring

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Improving Supply Chain Profit Through Reverse Factoring International Journal of Financial Studies Article Improving Supply Chain Profit through Reverse Factoring: A New Multi-Suppliers Single-Vendor Joint Economic Lot Size Model Beatrice Marchi 1,* , Simone Zanoni 1 and Mohamad Y. Jaber 2 1 Department of Mechanical and Industrial Engineering, Università degli Studi di Brescia, via Branze 38, I-25123 Brescia, Italy; [email protected] 2 Department of Mechanical and Industrial Engineering, Ryerson University, Toronto, ON M5B 2K3, Canada; [email protected] * Correspondence: [email protected] Received: 2 December 2019; Accepted: 3 April 2020; Published: 9 April 2020 Abstract: Supply chain finance has been gaining attention in theory and practice. A company’s financial position affects its performance and survivability in dynamic and volatile markets. Those that have weak financial performance are vulnerable when operating in environments that are uncertain and financially unstable. Companies adopt various solutions and techniques to manage, effectively and efficiently, the flow of money to and from its suppliers and buyers. Reverse factoring is an innovative technique in supply chain financing. This paper develops a joint economic lot size model where a vendor coordinates operational and financial decisions with its multiple suppliers through the establishment of a reverse factoring arrangement. The creditworthy vendor systematically informs a financial institution (e.g., bank) of payment obligations to selected suppliers, enabling the latter to borrow against the value of the relevant accounts receivable at low interest (borrowing) rates. The paper also presents a numerical example and a sensitivity analysis to illustrate the behavior of the model and to compare the economic and operational performance of a supply chain with and without a reverse factoring agreement. The results show that the establishment of a reverse factoring agreement within the supply chain improves the economic performance and impacts on the operational decisions. Keywords: supply chain management; JELS; inventory management; supply chain finance; reverse factoring JEL Classification: C61 1. Introduction European Small and Medium Enterprises (SMEs) have been benefitting from the EU’s economic recovery. Although those companies operated in uncertain environments with many contradictory signals, they have expressed a shared optimism with the European Commission regarding their financial positions because of the economic recovery (Kraemer-Eis et al. 2018). Despite this optimism, however, there is a strong need to manage liquidity more effectively and efficiently, especially within SMEs. Such companies continue to have difficulty securing loans to finance their operations. Lenders consider them high-risk, requiring that they pay higher capital costs to obtain funds, which suggests that significant asymmetries between small and larger firms exist. Enhancing SMEs’ access to capital facilitates a country’s transition towards a digital economy, by increasing investment in digitalization, and providing workers with on-the-job training opportunities. Financing terms and conditions differ among countries and across financial institutions. This variation is due to the uncertainty Int. J. Financial Stud. 2020, 8, 23; doi:10.3390/ijfs8020023 www.mdpi.com/journal/ijfs Int. J. Financial Stud. 2020, 8, 23 2 of 16 Int. J. Financial Stud. 2020, 8, x FOR PEER REVIEW 2 of 17 and instability of the financial markets, which affected many companies in many industries in the lastindustries decades, in the was last behind decades, the developmentwas behind th ofe Supplydevelopment Chain of Finance Supply (SCF) Chain as Finance a research (SCF) stream. as a Inresearch this regard, stream. the In relationshipthis regard, the between relationship industrial between companies industrial and companies the financial and sectorthe financial has become sector ahas subject become of greata subject interest of great to researchers interest to andresearch practitionersers and practitioners (Wuttke et al. (Wuttke 2016). et Although al. 2016). it Although has been gainingit has been attention, gaining researching attention, itsresearching impact, as its the impact, literature as shows,the literature on supply shows, chain on performance supply chain is limited.performance Understanding is limited. theUnderstanding relationship helpsthe relationship companies andhelps banks companies use their and resources banks effuseectively their andresources profitably. effectively and profitably. SCF can be defineddefined as “the inter-company optimization of financingfinancing as well as the integration of financingfinancing processes with with customers, customers, suppliers, suppliers, and and service service providers providers in in order order toto increase increase the the value value of ofall allparticipating participating companies” companies” (Pfohl (Pfohl and and Gomm Gomm 2009). 2009 It). accomplishes It accomplishes three three main main goals. goals. First, First, to toprovide provide visibility visibility and and control control over over all all cash-related cash-related processes processes within within a a supply supply chain chain (Observatory (Observatory for Supply Chain Finance 20172017).). Second, to optimize the financialfinancial flowsflows atat anan inter-organizationalinter-organizational levellevel ((HofmannHofmann 20052005).). Third, to implement a set of solutions, either by financialfinancial institutions or technology providersproviders ((CaniatoCaniato etet al.al. 20162016).). The ultimate objective is to align financial financial flowsflows with the coordination of traditionaltraditional flowsflows within within the the supply supply chain chain (i.e., (i.e product., product and and information information flows), flows), improving improving cash-flow cash- managementflow management from afrom supply a supply chain ch perspectiveain perspective (Wuttke (Wuttke et al. 2013 et al.). 2 The013). success The success of SCF of depends SCF depends on the cooperationon the cooperation between between the actors the in actors a supply in a chain, supply which chain, can which result can in several result benefits,in several e.g., benefits, lower debte.g., costs,lower newdebt opportunities costs, new opportunities to obtain loans to (especially obtain loans for weak(especially supply for chain weak players), supply or chain reduced players), working or capitalreduced within working the capital supply within chain. the Moreover, supply chain. an SCF Moreover, approach an oftenSCF approach improves often trust, improves commitment, trust, andcommitment, profitability and throughout profitability the chainthroughout (Randall the and chain Farris (Randall 2009). SCFand focusesFarris 2009). on creating SCF liquidityfocuses on in acreating supply chainliquidity by exploringin a supply various chain solutions by explorin withg orvarious without solutions a facilitating with technologyor without ( Gelsominoa facilitating et al.technology 2016), which (Gelsomino is either et supplier-based al. 2016), which finance, is either buyer-based supplier-based finance, finance, or both, buyer-based where Figure finance,1 shows or aboth, possible where breakdown Figure 1 shows of supply a possible chain financingbreakdown mechanisms. of supply chain financing mechanisms. Supply Chain Finance Supplier financing Buyer financing other Trade credit Reverse factoring Cash pooling Financial Debt financing for Agency cost of debt guarantees inventory and investments Purchase order Self-financed for finance inventory and investments Revenue-sharing contracts Figure 1. Supply chain finance solutions. Figure 1. Supply chain finance solutions. Among the buyer-based financing mechanisms, Reverse Factoring (RF) is one that has received Among the buyer-based financing mechanisms, Reverse Factoring (RF) is one that has received considerable attention from both the business and research communities. This interest is because considerable attention from both the business and research communities. This interest is because it it allows for the reduction of both the net operating working capital and the cash-to-cash cycle of allows for the reduction of both the net operating working capital and the cash-to-cash cycle of a a company and to improve supplier financial rating. Many firms use this scheme to induce their company and to improve supplier financial rating. Many firms use this scheme to induce their strategic suppliers, who usually are difficult to replace, to grant them flexible, mostly lenient, payment strategic suppliers, who usually are difficult to replace, to grant them flexible, mostly lenient, terms. Recent advancements in technology allowed firms to offer reverse factoring and to effectively payment terms. Recent advancements in technology allowed firms to offer reverse factoring and to manage it despite the challenging economic conditions (Hurtrez and Salvadori 2010). In reverse effectively manage it despite the challenging economic conditions (Hurtrez and Salvadori 2010). In reverse factoring, a buyer systematically informs a financial institution (e.g., a bank) of payment obligations to selected suppliers, enabling the latter to borrow against the value of the relevant accounts receivable at low interest (borrowing) rates (Klapper 2006; Van Der Vliet et al. 2015). In Int. J. Financial Stud. 2020, 8, 23 3 of 16 factoring, a buyer systematically informs a financial institution (e.g., a bank) of payment obligations to selected suppliers, enabling the latter to borrow against the value of the relevant
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