In supply chains where there is a smaller channel partner with tight budget constraints, flow of materials, products and cash through the channel can suffer significantly, and as a result, all supply chain participants can be hurt. In order to remedy this problem, in recent years, some larger companies have been implementing innovative contracting solutions aimed to ease the financial frictions in the supply chain. In this paper, we present several examples of emerging solutions employed in practice, which involve larger firms providing guarantees in various forms to reduce financing costs for smaller partners, and discuss some recent results from the literature studying these solutions. The main example we discuss is Buyer Intermediated Financing, studied in Tunca and Zhu (2017), where a large buyer can significantly reduce its suppliers’ financing costs by guaranteeing the repayment of suppliers’ loans. We discuss the insights from our study on why and how such a scheme can reduce wholesale prices, increase order fill rates, and create a win-win for suppliers and retailers. In addition, we discuss future research directions on financial guarantees by large supply chain partners based on newly emerging practices.
{"title":"Improving Channel Efficiency through Financial Guarantees by Large Supply Chain Participants","authors":"T. Tunca, Weiming Zhu","doi":"10.1561/0200000066","DOIUrl":"https://doi.org/10.1561/0200000066","url":null,"abstract":"In supply chains where there is a smaller channel partner with tight budget constraints, flow of materials, products and cash through the channel can suffer significantly, and as a result, all supply chain participants can be hurt. In order to remedy this problem, in recent years, some larger companies have been implementing innovative contracting solutions aimed to ease the financial frictions in the supply chain. In this paper, we present several examples of emerging solutions employed in practice, which involve larger firms providing guarantees in various forms to reduce financing costs for smaller partners, and discuss some recent results from the literature studying these solutions. The main example we discuss is Buyer Intermediated Financing, studied in Tunca and Zhu (2017), where a large buyer can significantly reduce its suppliers’ financing costs by guaranteeing the repayment of suppliers’ loans. We discuss the insights from our study on why and how such a scheme can reduce wholesale prices, increase order fill rates, and create a win-win for suppliers and retailers. In addition, we discuss future research directions on financial guarantees by large supply chain partners based on newly emerging practices.","PeriodicalId":39990,"journal":{"name":"Foundations and Trends in Technology, Information and Operations Management","volume":"55 1","pages":"289-304"},"PeriodicalIF":0.0,"publicationDate":"2017-12-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76684670","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In the operations management literature, the financial risk in an inventory model is usually assumed to be captured by the (constant) weighted average cost of capital (WACC) of the firm. This assumption is, at best, an approximation, since this cost depends on the risk of the cash flows, which, in turn, depends on the inventory policy. This paper explores what the right cost of capital should be in an inventory model with deterministic demand. We find that, in contrast to other existing models, risk is not in general a monotone function of inventory. Also, a rate close to the risk-free rate, which typically deviates significantly from the WACC, should be used to value inventory-related investments when the inventory cost function is dominated by holding cost for large order quantities, even if investments are subject to other sources of financial variability.
{"title":"On the Cost of Capital in Inventory Models: The Case of Deterministic Demand","authors":"A. Serrano","doi":"10.1561/0200000060","DOIUrl":"https://doi.org/10.1561/0200000060","url":null,"abstract":"In the operations management literature, the financial risk in an inventory model is usually assumed to be captured by the (constant) weighted average cost of capital (WACC) of the firm. This assumption is, at best, an approximation, since this cost depends on the risk of the cash flows, which, in turn, depends on the inventory policy. This paper explores what the right cost of capital should be in an inventory model with deterministic demand. We find that, in contrast to other existing models, risk is not in general a monotone function of inventory. Also, a rate close to the risk-free rate, which typically deviates significantly from the WACC, should be used to value inventory-related investments when the inventory cost function is dominated by holding cost for large order quantities, even if investments are subject to other sources of financial variability.","PeriodicalId":39990,"journal":{"name":"Foundations and Trends in Technology, Information and Operations Management","volume":"36 1","pages":"338-357"},"PeriodicalIF":0.0,"publicationDate":"2017-12-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"77289975","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper examines the interaction between operational flexibility and financial flexibility in a multi-product business unit that makes operational decisions based on financial resources provided by its parent company (or headquarters). We capture operational flexibility through investment in flexible technology and financial flexibility through higher availability of financial resources. We consider the flexible-versus-dedicated technology choice and capacity investment decisions of a two-product business unit under demand uncertainty in the presence of budget constraints. The unit operates under a capital budget for financing the capacity investment, and an operating budget, which is uncertain in the capacity investment stage, for financing the production. We investigate how financial flexibility in the capacity investment stage (as captured by the stringency of the capital budget) and financial flexibility in the production stage (as captured by the likelihood of having sufficient operating budget to fully cover the production cost) shape the optimal technology choice. We identify the critical role that the relative capacity intensity (the ratio of unit capacity cost to total unit capacity and production cost) of each technology plays. Our results have implications about how to deploy technologies with different capacity intensity profiles, which are shaped by automation level or plant location choices.
{"title":"The Interaction between Operational Flexibility and Financial Flexibility","authors":"Onur Boyabatlı, Tiecheng Leng","doi":"10.1561/0200000077","DOIUrl":"https://doi.org/10.1561/0200000077","url":null,"abstract":"This paper examines the interaction between operational flexibility and financial flexibility in a multi-product business unit that makes operational decisions based on financial resources provided by its parent company (or headquarters). We capture operational flexibility through investment in flexible technology and financial flexibility through higher availability of financial resources. We consider the flexible-versus-dedicated technology choice and capacity investment decisions of a two-product business unit under demand uncertainty in the presence of budget constraints. The unit operates under a capital budget for financing the capacity investment, and an operating budget, which is uncertain in the capacity investment stage, for financing the production. We investigate how financial flexibility in the capacity investment stage (as captured by the stringency of the capital budget) and financial flexibility in the production stage (as captured by the likelihood of having sufficient operating budget to fully cover the production cost) shape the optimal technology choice. We identify the critical role that the relative capacity intensity (the ratio of unit capacity cost to total unit capacity and production cost) of each technology plays. Our results have implications about how to deploy technologies with different capacity intensity profiles, which are shaped by automation level or plant location choices.","PeriodicalId":39990,"journal":{"name":"Foundations and Trends in Technology, Information and Operations Management","volume":"11 1","pages":"13-31"},"PeriodicalIF":0.0,"publicationDate":"2017-12-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"87972936","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Purchase Order (PO) finance is a form of financial intermediation which can alleviate capital constraints in certain supply chains. PO finance is typically utilized by small and medium-sized enterprises (SMEs) that operate as importers, exporters, wholesalers, or distributors and have high sales growth. When applicable, PO finance creates value for the supply chain by providing capital that is not available through regular lending channels, due to informational problems. We provide a conceptual model that clarifies the value proposition of PO finance and describe how the transactions are carried out in practice. The conceptual model allows us to highlight the settings where economic conditions will favor the application of PO finance.
{"title":"Purchase Order Finance: A Conceptual Model with Economic Insights","authors":"Fehmi Tanrısever, M. Bergen, M. Reindorp","doi":"10.1561/0200000065","DOIUrl":"https://doi.org/10.1561/0200000065","url":null,"abstract":"Purchase Order (PO) finance is a form of financial intermediation which can alleviate capital constraints in certain supply chains. PO finance is typically utilized by small and medium-sized enterprises (SMEs) that operate as importers, exporters, wholesalers, or distributors and have high sales growth. When applicable, PO finance creates value for the supply chain by providing capital that is not available through regular lending channels, due to informational problems. We provide a conceptual model that clarifies the value proposition of PO finance and describe how the transactions are carried out in practice. The conceptual model allows us to highlight the settings where economic conditions will favor the application of PO finance.","PeriodicalId":39990,"journal":{"name":"Foundations and Trends in Technology, Information and Operations Management","volume":"1 1","pages":"305-323"},"PeriodicalIF":0.0,"publicationDate":"2017-12-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82380331","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study joint operational and financing decisions of a cashconstrained manufacturing firm in the presence of bank financing and trade credit, where banks set credit limit based on borrowers repayment histories. Trade credit financing enables the manufacturing firm to build credit history, which affects bank financing availability in the future periods. This can make trade credit valuable, even though it is costly in the current period. We quantify the value of trade credit as a way of securing access to future bank financing and investigate how financing considerations distort the firm’s operational decisions.
{"title":"Trade Credit as an Option to Acquire Financing","authors":"P. Brunet, V. Babich, T. Aouam","doi":"10.1561/0200000067","DOIUrl":"https://doi.org/10.1561/0200000067","url":null,"abstract":"We study joint operational and financing decisions of a cashconstrained manufacturing firm in the presence of bank financing and trade credit, where banks set credit limit based on borrowers repayment histories. Trade credit financing enables the manufacturing firm to build credit history, which affects bank financing availability in the future periods. This can make trade credit valuable, even though it is costly in the current period. We quantify the value of trade credit as a way of securing access to future bank financing and investigate how financing considerations distort the firm’s operational decisions.","PeriodicalId":39990,"journal":{"name":"Foundations and Trends in Technology, Information and Operations Management","volume":"7 1","pages":"237-252"},"PeriodicalIF":0.0,"publicationDate":"2017-12-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"75966404","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We consider a multi-divisional firm in which each division replenishes its inventory and the headquarter coordinates the cash flow through a master account over a finite horizon. The demands of the divisions are stochastic and may be correlated. The objective is to find an optimal joint inventory replenishment and cash retention policy which maximizes the firm’s working capital. We show that this problem is equivalent to minimizing the total system cost. Due to curse of dimensionality, the optimal policy is difficult to obtain. Nevertheless, we characterize the properties of the optimal policy and develop a simple heuristic that possesses these properties. A numerical study shows that the heuristic is near-optimal. We explore managerial insights through the heuristic. Among others, we find that the value of cash pooling is most significant when the demands of the divisions are negatively correlated.
{"title":"Managing Inventory for a Multidivisional Firm with Cash Pooling","authors":"Kevin H. Shang, Jianan Wang, Yi Yang","doi":"10.1561/0200000064","DOIUrl":"https://doi.org/10.1561/0200000064","url":null,"abstract":"We consider a multi-divisional firm in which each division replenishes its inventory and the headquarter coordinates the cash flow through a master account over a finite horizon. The demands of the divisions are stochastic and may be correlated. The objective is to find an optimal joint inventory replenishment and cash retention policy which maximizes the firm’s working capital. We show that this problem is equivalent to minimizing the total system cost. Due to curse of dimensionality, the optimal policy is difficult to obtain. Nevertheless, we characterize the properties of the optimal policy and develop a simple heuristic that possesses these properties. A numerical study shows that the heuristic is near-optimal. We explore managerial insights through the heuristic. Among others, we find that the value of cash pooling is most significant when the demands of the divisions are negatively correlated.","PeriodicalId":39990,"journal":{"name":"Foundations and Trends in Technology, Information and Operations Management","volume":"2012 1","pages":"324-337"},"PeriodicalIF":0.0,"publicationDate":"2017-12-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"86377712","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper studies a supply chain composed of a supplier and a buyer. The supplier has to make a buyer-specific capacity investment before demand uncertainty has been resolved. After the uncertainty has been revealed, the firms decide whether to trade with each other and on what terms through bilateral bargaining. I show that the supplier will borrow risky debt and invest more in capacity than if it Ire purely equity financed. The expanded capacity under risky borrowing is below the channel-efficient level if it is optimal to finance capacity investment with a mixture of equity and debt, and above the channel-efficient level if it is optimal to finance capacity investment entirely with debt.
{"title":"Debt Financing and Supply Chain Capacity Investment","authors":"Qiaohai Hu","doi":"10.1561/0200000068","DOIUrl":"https://doi.org/10.1561/0200000068","url":null,"abstract":"This paper studies a supply chain composed of a supplier and a buyer. The supplier has to make a buyer-specific capacity investment before demand uncertainty has been resolved. After the uncertainty has been revealed, the firms decide whether to trade with each other and on what terms through bilateral bargaining. I show that the supplier will borrow risky debt and invest more in capacity than if it Ire purely equity financed. The expanded capacity under risky borrowing is below the channel-efficient level if it is optimal to finance capacity investment with a mixture of equity and debt, and above the channel-efficient level if it is optimal to finance capacity investment entirely with debt.","PeriodicalId":39990,"journal":{"name":"Foundations and Trends in Technology, Information and Operations Management","volume":"41 1","pages":"358-371"},"PeriodicalIF":0.0,"publicationDate":"2017-12-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"78123930","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The seminal paper of Brander and Lewis (1986) concludes that debt financing causes two firms that engage in a Cournot game to behave more aggressively in the product market. However, both firms are worse off than if they are purely equity financed, resulting in the so-called prisoner’s dilemma. Incorporating two supply chain structures, distributional and parallel, we explore the effect of supply chain upstream structure on the downstream retailers’ strategic use of debt. We find that this prisoner dilemma persists because the upstream benefits from the intensified downstream competition. Moreover, the supply expansion effect is more pronounced in the parallel structure than in the distributional one, because each dedicated supplier in the parallel structure abets its retailer to compete more aggressively against the competitor by lowering its wholesale price. Therefore, the strategic effect of debt financing not only deters the competitor but also “squeezes†its supplier. In contrast, the common supplier in the distributional structure adopts an inertia strategy, keeping the same price regardless of the downstream’s debt levels because overheated downstream competition may be detrimental to it.
{"title":"Supply Chain Debt Financing in Competition","authors":"Qiaohai Hu, P. Su","doi":"10.1561/0200000070","DOIUrl":"https://doi.org/10.1561/0200000070","url":null,"abstract":"The seminal paper of Brander and Lewis (1986) concludes that debt financing causes two firms that engage in a Cournot game to behave more aggressively in the product market. However, both firms are worse off than if they are purely equity financed, resulting in the so-called prisoner’s dilemma. Incorporating two supply chain structures, distributional and parallel, we explore the effect of supply chain upstream structure on the downstream retailers’ strategic use of debt. We find that this prisoner dilemma persists because the upstream benefits from the intensified downstream competition. Moreover, the supply expansion effect is more pronounced in the parallel structure than in the distributional one, because each dedicated supplier in the parallel structure abets its retailer to compete more aggressively against the competitor by lowering its wholesale price. Therefore, the strategic effect of debt financing not only deters the competitor but also “squeezes†its supplier. In contrast, the common supplier in the distributional structure adopts an inertia strategy, keeping the same price regardless of the downstream’s debt levels because overheated downstream competition may be detrimental to it.","PeriodicalId":39990,"journal":{"name":"Foundations and Trends in Technology, Information and Operations Management","volume":"36 1","pages":"388-406"},"PeriodicalIF":0.0,"publicationDate":"2017-12-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76379492","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study the performance of a supply chain where N retailers and a single producer compete in a Cournot-Stackelberg game. We assume the retailers are budget-constrained and their profits depend on the realized path of some tradeable (stochastic) economic index. The supply chain might therefore be more profitable if the retailers were able to reallocate their budgets across different states of nature. In order to affect such a reallocation, we assume the retailers are able to trade dynamically in the financial market. We solve the Cournot-Stackelberg equilibrium when the retailers have identical budgets and study the impact that competition and hedging have on the supply chain and on the various players including the firms themselves, the end consumers and society as a whole. We show, among other things, that when the retailers can hedge there exists an optimal level of competition, ¯N that is often finite and optimal from the perspective of the consumers, the firms and society as a whole. In contrast, when the retailers cannot hedge, these welfare measures are uniformly increasing in N.
{"title":"A Cournot-Stackelberg Model of Supply Contracts with Financial Hedging and Identical Retailers","authors":"René Caldentey, M. Haugh","doi":"10.1561/0200000075","DOIUrl":"https://doi.org/10.1561/0200000075","url":null,"abstract":"We study the performance of a supply chain where N retailers and a single producer compete in a Cournot-Stackelberg game. We assume the retailers are budget-constrained and their profits depend on the realized path of some tradeable (stochastic) economic index. The supply chain might therefore be more profitable if the retailers were able to reallocate their budgets across different states of nature. In order to affect such a reallocation, we assume the retailers are able to trade dynamically in the financial market. We solve the Cournot-Stackelberg equilibrium when the retailers have identical budgets and study the impact that competition and hedging have on the supply chain and on the various players including the firms themselves, the end consumers and society as a whole. We show, among other things, that when the retailers can hedge there exists an optimal level of competition, ¯N that is often finite and optimal from the perspective of the consumers, the firms and society as a whole. In contrast, when the retailers cannot hedge, these welfare measures are uniformly increasing in N.","PeriodicalId":39990,"journal":{"name":"Foundations and Trends in Technology, Information and Operations Management","volume":"125 5 1","pages":"124-143"},"PeriodicalIF":0.0,"publicationDate":"2017-12-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"88526355","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This monograph is an attempt to establish a framework for Operations in Financial Services as a research area from an Operations Management perspective. Operations in Financial Services has not developed itself yet as a well-defined research area within the Operations Management community. It has been touched upon by researchers from various different disciplines, including Operations Management, Statistics, Information Technology, Finance, and Marketing. However, each discipline has a different perspective on what the important issues are and the various disciplines are often 0200000048at odds with one another. This monograph has been written from an Operations Management perspective.
{"title":"Operations in Financial Services: Processes, Technologies, and Risks","authors":"Michael Pinedo, Yuqian Xu","doi":"10.1561/0200000048","DOIUrl":"https://doi.org/10.1561/0200000048","url":null,"abstract":"This monograph is an attempt to establish a framework for Operations in Financial Services as a research area from an Operations Management perspective. Operations in Financial Services has not developed itself yet as a well-defined research area within the Operations Management community. It has been touched upon by researchers from various different disciplines, including Operations Management, Statistics, Information Technology, Finance, and Marketing. However, each discipline has a different perspective on what the important issues are and the various disciplines are often 0200000048at odds with one another. This monograph has been written from an Operations Management perspective.","PeriodicalId":39990,"journal":{"name":"Foundations and Trends in Technology, Information and Operations Management","volume":"8 1","pages":"223-342"},"PeriodicalIF":0.0,"publicationDate":"2017-12-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"83600954","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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