The impact of payment term extensions on the working capital management of an automotive supply chain

Abstract

Substantial evidence has shown that payment delays generate negative effects on suppliers’ working capital level and thus can further affect the entire supply chain’s working capital efficiency and even result in bankruptcy for capital-constrained suppliers. The adoption of emerging solutions such as supply chain finance (SCF) is considered an innovative approach to deal with this issue. However, the current literature seldom considers the impact of payment term extensions on the supply chain’s working capital management (WCM) through the development of applicable SCF methods. Thus, motivated by how SCF can improve a supply chain’s WCM in the presence of payment delay, we establish a multi-cycle model and identify the conditions under which extended payments will impact on the supply chain’s collaborative cash to cash (CC2C) cycle and the shareholder-value added (SVA). Finally, the numerical analysis not only confirms the major findings of this paper but also provides some additional insights that can assist practitioners in mitigating the adverse effects caused by payment delays.

KEYWORDS:

• Payment term extension
• working capital management
• supply chain finance
• reverse factoring
• operations management
• supply chain risk management

Data availability statement

The data that support the findings of this study are available from the corresponding author upon reasonable request.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 https://www.devb.gov.hk/filemanager/en/content_31/Survey_on_Payment_Pracitce_in_the_Construction_Industry_Executive_Summary.pdf.

2 https://www.pwc.com/vn/en/deals/assets/scf-barometer-2018-2019.pdf.

3 https://www.invu.net/2020/07/21/working-capital-management-or-chaos/.

Additional information

Funding

The work described in this paper was substantially supported by a grant from the Research Committee of The Hong Kong Polytechnic University under student account RK37.

Notes on contributors

Chaorui Huang

Chaorui Huang is currently a PhD candidate in the Department of Industrial and Systems Engineering, The Hong Kong Polytechnic University. He received his BE in Mechanical Engineering from the Southwest Jiaotong University and obtained his MSc in Supply Chain and Logistics Management jointly from the Hong Kong Polytechnic University and the University of Warwick. His current research interests are supply chain finance, operations management and game theory.

Felix T. S. Chan

Felix Chan received his BSc Degree in Mechanical Engineering from Brighton University, UK, and obtained his MSc and PhD in Manufacturing Engineering from the Imperial College of Science and Technology, University of London, UK. Prior joining Macau University of Science and Technology, Prof. Chan has many years of working experience in other universities including The Hong Kong Polytechnic; University of Hong Kong; University of South Australia; University of Strathclyde. His current research interests are Logistics and Supply Chain Management, Decision Making, AI Optimisation, Operations Research, Production and Operations Management, Distribution Coordination. To date, Prof. Chan has published over 16 book chapters, over 390 SCI refereed international journal papers and 320 peer reviewed international conference papers. His total number of citations >11,000 h, Index = 54. Prof. Chan is a chartered member of the Chartered Institute of Logistics and Transport in Hong Kong. Based on the recent compilations (2020) and (2021) from a research group of Stanford about the impact of scientists (top 2% listed). The work is published in the following websites: https://journals.plos.org/plosbiology/article?id=10.1371/journal.pbio.3000918; and doi:10.17632/btchxktzyw.3. Prof. Felix Chan is categorised in the field of Operations Research, ranked 10 out of over 23,450 scientists worldwide, i.e. Top 0.04% worldwide, for TWO consecutive years (2020 and 2021).

S. H. Chung

Sai-Ho Chung, PhD, is an Associate Professor in the Industrial and Systems Engineering at the Hong Kong Polytechnic University. He obtained his PhD degree from the University of Hong Kong. His research interests include logistics and supply chain management, supply chain collaboration, production scheduling, distributed scheduling, distribution network, etc. Dr Chung has published over 80 SCI journal papers.