Working Capital Optimization in Supply Chains

Abstract

This article is devoted to working capital management and its optimization on an inter-organizational level when supply chain members operate collaboratively. We aim to develop and validate a model of collaborative approach to working capital management in supply chains for cases of constrained liquidity and imposed return requirements using supply chain finance (factoring, reverse factoring and inventory financing). As such, we suggest a tool of working capital optimization using financial terms and cash flows verified on Russian supply chain data. Mathematical modeling is suggested as a method to modify an existing working capital management model on the grounds of collaborative financial cost minimization under industry specific liquidity constraints. These liquidity constraints are constructed in such a way as to eliminate possible violations from companies, because their violation will lead to the inverse relation between liquidity and rate of return. The results of the optimization provide recommended values for cash conversion cycle elements – days of inventories, days of accounts payable, days of accounts receivable – that guarantee the coordinating effect of collaborative working capital management. Calculation, further optimization and monitoring of cash conversion cycle values sustain effective working capital management on an inter-organizational level while meeting the liquidity and return levels for each company in a chain. The suggested model can be implemented for a day-to-day decision making process by companies oriented to stay competitive in the long run. Besides, the results obtained show the potential for further coordination among the key members of the supply chain in terms of aligning financial, product, and information flows. Despite the fact that the model provides a static solution to the problem of collaborative working capital management, it has potential for the further development of a dynamic algorithm. Future research should seek to investigate the possible imputation options for gained costs reduction values on the grounds of cooperative games with a coalition structure.

Keywords: supply chain management, supply chain finance,working capital, working capital management, cash conversion cycle, collaborative cash conversion cycle

JEL Classification: C02, C61, G31, G32, M4