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Supply chain finance: optimizing financial flows in supply chains

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Logistics Research

Abstract

Issues related to flows of goods and information are frequently discussed in the logistics and Supply Chain Management literature. But, only few contributions are exploring the financial flows associated with supply chains. This article reviews the state-of-the-art of research regarding financial flows in supply chains. In doing so, it becomes apparent that an explicit examination and optimisation of the cost of capital has been missing so far. In order to close this gap, a conceptual framework and a mathematical model of “Supply Chain Finance” is proposed.

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Notes

  1. Cf. [22, p. 32], [34, S. 1 ff], [43, p. 6 ff].

  2. Cf. [1, p. 40 ff], [30, p. 321 ff], [45, p. 18], [46, p. 1], [51, p. 30 ff]. An up-to-date summary of the empiric research regarding SCM can be found in [19, p. 417 ff].

  3. Cf. e.g. [20, p. 567 ff], [27, p. 104 ff], [51, p. 30 ff], [57], [59, p. 110 ff], [8, p. 44 f].

  4. This paper is based on the doctorate thesis of Moritz Gomm in German. [21].

  5. Cf. [43, p. 6].

  6. [43, p. 6 ff].

  7. Cf. [12, p. 67 ff].

  8. [11, p. 10].

  9. [38, p. 19].

  10. Cf. [44, p. 168].

  11. Cf. [5, p. 574], [10], [8], p. 44 ff), [21], [25, p. 695 ff], [29].

  12. Cf. [46, p. 2 ff].

  13. Cf. [17, p. 149 f], [27, p. 103 f], [40, p. 123], [46, p. 2 ff].

  14. Cf. [51, p. 30 f].

  15. Cf. [52, p. 140].

  16. This contains according to [52, p. 142], logistics real estates, inventory, as well as logistics services to achieve financing effects.

  17. Cf. [50, p. 171 ff].

  18. Cf. [18, p. 187 ff].

  19. Cf. [42], [58, p. 74].

  20. Cf. [42], [58, p. 74].

  21. Cf. [42, p. 21].

  22. Cf. [42, p. 67].

  23. [9, p. 87]. He speaks about "[…] plant, depots and warehouses that form the logistics network […]“ as well as "[…] materials handling equipment, vehicles and other equipment involved in transport […]“. See also [18, p. 193].

  24. Cf. [41, p. 152], [56, p. 176].

  25. Cf. [6], [26, p. 79], [31, p. 476], [48, p. 821].

  26. Cf. [54, p. 393].

  27. Cf. [16, p. 417].

  28. [34, p. 5 ff].

  29. [46, p. 15 f].

  30. Cf. [4, p. 15 ff].

  31. Cf. [2], [4, p. 14 f], [23, p. 193], [35, p. 382], [53, p. 105 ff].

  32. Cf. [15, p. 11].

  33. Cf. [4, p. 15 f], [15, p. 11].

  34. Cf. [4, p. 25 ff].

  35. [36, p. 53 as well as p. 64 f].

  36. Cf. [47, p. 69].

  37. Cf. [32, p. 107].

  38. [28, p. 305 ff].

  39. According to New Institutional Economics, there exist e.g. banking houses as control agents of the depositors who thus take over a quality transformation. Cf. [13], [14] as well as [36]. Moreover, financial intermediaries bear further transformation functions in oder to arrange a more efficient balance between asset requirements and financial requirements, cf. [4], p. 430 ff), [3, p. 120 ff], [4, p. 29 f], [15, p. 12 ff] as well as [13, p. 393 ff]. According to Löffler, financial intermediaries are thus more generally “[…] institutions to reduce financing costs under asymmetrical distribution of information.”[7, p. 921], explains why the formation of financial intermediaries has to be seen as advantageously even from the point of view of the capital seekers. The transaction costs also play an important role for the explanation of the existence of financial intermediaries, cf. [15, pp. 28–30] and the literature quoted there.

  40. These dimensions can be found in similar styles elsewhere in corporate finance. Cf. [33, p. 1373].

  41. [39, p. 719 ff].

  42. In SCM research usually two members models of supply chains are used. A good overview over such a 2-actor-model can be found in [55, p. 13 ff].

  43. The one period approach in this case means no restriction since the rate of return could also be interpreted as actual cash value. The “statics” of the model refer to the moment of financing and of investment which, in the basic model—can only be made once (at the beginning).

  44. As an alternative, it could be assumed that the life span of the project is limited, so that a financing by means of additional proprietary capital is not reasonable. But this assumption is difficult to hold up e.g. concerning logisitcs real estates.

  45. This restriction eliminates the possibility of mixed financing that does not limit the results and the informational value of the model.

  46. Cf. [60, p. 508 f].

  47. This benefit thus does not exist if N finances the project via K.

  48. y can also be interpreted as positive (external) image effect since N delegates the financing of P to G (G could e.g. be a logistics service provider who takes over a real estate from N and organises the latter). The advantage of a financing by G results from third-party business in which the (better) image plays a role.

  49. Thus, neither can G transfer his information of p nor can transfer N his information of r project on the investor K in order to decrease the costs of financing; or the transfer is prohibitively expensive.

  50. This means that G either is a very large or risk-free company, while N e.g. is a smaller company, or it is in a sector of higher volatility.

  51. This can be achieved by precise additional conditions which do not influence the result of the survey on hand, as described in [49, p. 111].

  52. Out of this follows amongst other that the error rate regarding the expected rate of return of the managers is minor to the one of the external investors. For this purpose cf. [7, p. 916].

  53. This assumption implicates that—if N is able to achieve surplus returns by the help of G–G cannot claim a share in it, even though it theoretically could enforce it. G thus does not negotiate regarding the basic model.

  54. “Information transfer” means that G does not only obtain more and better information concerning project P, but also that G is able to better observe and evaluate all actions and results concerning P (monitoring), e.g. by the possibility of accession to the project.

  55. That company N can retain the complete surplus rate of return opposite to a financing by K is due to the assumed willingness of G to finance, even though he does not profit from it himself.

  56. Using a curved function for the cost of information transfer leads to the same fundamental results but complicates the calculation at this point.

  57. Consequently, in order to get complete information, only the costs in the amount of (1 − p 0 )*C would be necessary.

  58. This optimum is annotated with the index “infopt” because it is the maximum rate of return to strive for if the overall rate of return of N can be increased by further information transfer. In the following, it will be notified that—depending on the point of departure—there exist different maxima.

  59. The model is thus consistent with the intuitional insight that information are only valuable if other do not (yet) possess them. Due to the transfer (against payment), they lose their value for the sender as regards the receiver. However, the pieces of information could still continue to be valuable for the owner if he can sell them to third persons.It should be noted that there also are combinations in which there is absolutely no possibility for an optimisation by the help of information transfer. This always is the case if due to the parameters i N , i G and r project , the point p min is bigger than p infopt and the level of information p 0 of G is smaller than p min .

  60. Cf. [24, p. 46].

  61. Cf. [37, p. 1178].

  62. Cf. [14, p. 852].

  63. Cf. [21].

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Authors and Affiliations

  1. Chair of Management and Logistics, Technical University of Darmstadt, Hochschulstraße 1, 64289, Darmstadt, Germany

    Hans-Christian Pfohl

  2. Momax GmbH, Klappacherstr. 30, 64285, Darmstadt, Germany

    Moritz Gomm

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Appendix: Model variables

Appendix: Model variables

P :

A supply chain-related project

N :

A company in the supply chain with demand for project P (e.g. N is an OEM)

G :

A company in the supply chain related to P, thus having revenue-relevant information on P (e.g. G is a supplier of N)

K :

A source of capital for N and G (e.g. K is a bank)

i N :

Interest rate of K for N

i G :

Interest rate of K for G

y :

Benefit from positive effects for G if G finances project P

c :

Marginal costs for transferring information on P from N to G

r project :

Rate of return of project P

p :

Probability of project P success from the point of view of G (0 < p ≤ 1)

r G :

Expected rate of return of G from N for financing project P

r G _total :

Overall rate of return of G

r N :

Overall rate of return of N

C :

Cost for all information on project P

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Pfohl, HC., Gomm, M. Supply chain finance: optimizing financial flows in supply chains. Logist. Res. 1, 149–161 (2009). https://doi.org/10.1007/s12159-009-0020-y

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