Supply chain shared risk self-financing for incremental sales

ABSTRACT

Lack of credit during periods of financial stress can reduce sales in an entire supply chain. To reduce the reliance on external credit, we introduce a new financing framework in which key supply chain stakeholders accept delayed payment for a pre-agreed portion of their product or service. By doing so throughout the supply chain, each stakeholder must self-finance only their in-house activities—but not the cost of purchased components and services because those are in turn financed by their suppliers. Intended to account for only a small fraction of sales, this framework is limited to supplying customers who do not qualify for external financing. The payments from these customers are distributed among the value chain stakeholders according to an agreed-upon policy. These additional sales would otherwise be lost for lack of consumer credit. This approach increases sales and profitability for the entire supply chain and is especially advantageous during credit crunches. In addition to describing this new financing framework, this article places it in the context of other financing arrangements, provides an example with cash flow and net present value calculations, and identifies implementation challenges and characteristics of supply chains that are good candidates.

Additional information

Notes on contributors

David J. A. Gonsalvez

David J. A. Gonsalvez, Ph.D., is the CEO and Rector of the Malaysia Institute for Supply Chain Innovation. He received his Ph.D. from the Ohio State University in industrial engineering.

Robert R. Inman

Robert R. Inman, Ph.D., P.E., is a staff research engineer at General Motors Research & Development. He earned his B.S. in civil engineering from the University of Illinois at Urbana–Champaign and M.S. and Ph.D. in industrial engineering and management science from Northwestern University. He is a senior member of the Institute of Industrial Engineers.