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Value of Reverse Factoring in Multi-stage Supply Chains

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Speaker: Fehmi Tanrisever, Bilkent University
Event date: Wednesday, 16 October 2019 12:30 pm - 01:30 pm
Place: Building B
Room E01 B14
6 rue Richard Coudenhove-Kalergi
L-1359 Luxembourg

Research seminar

Abstract

We consider a two-stage supply chain where a large corporate customer procures from a credit-constrained small or medium-sized supplier.

In this setting, we examine how application of reverse factoring can influence the operational and financial decisions of the firms and create value. In a typical reverse factoring arrangement, the supplier pledges accounts receivables as collateral to obtain financing at a more competitive rate, in exchange for a longer payment period. We consider both make-to-order and make-to-stock settings for our analysis, and endogenously determine the interest rates to avoid credit arbitrage.

Reverse factoring creates value by

(i) reducing financing costs (financial benefits), and

(ii) increasing production level (operational benefits) in the supply chain.

We find that while the corporation’s operational benefits greatly exceed the financial benefits, this result is typically reversed for the supplier. The supplier’s benefits are also highly sensitive to the payment period extension, since it interacts with the operations of the supplier and reduces the total available benefits of reverse factoring.

In addition, an increase in production level due to reverse factoring and value creation do not imply each other when the risk-free rate is positive. We prove that if the initial cash reserve of the supplier is below (above) a certain threshold, then reverse factoring creates (destroys) value to the supplier even when there is no (an) operational enhancement.

Our results also point out that lowering risk-free rates may discourage the creation of supply chain finance solutions, further limiting smaller firms’ access to capital.

Biography

Fehmi Tanrisever received his PhD degree in Supply Chain and Operations Management from the McCombs School of Business of the University of Texas at Austin in 2009.

After receiving his PhD, he worked an assistant professor of Operations Management and Finance at the Industrial Engineering and Innovation Sciences Department at Eindhoven University of Technology until 2013. He is currently employed as an associate professor of Operations Management at Bilkent University.

His research interests include Operations and Finance Interface, Supply Chain Finance, Energy Operations Management, Commodity Risk Management and Applications of Business Analytics in Electricity Markets. He teaches graduate and undergraduate level courses in integrated operational and financial risk management, operations management, business finance and financial accounting.

His academic work appeared in journals including Operations Research, M&SOM, Production and Operations Management, Journal of Operations Management and Entrepreneurship Theory and Practice.

 

Registration by email to Jackie.brown@uni.lu 

Link: Fehmi Tanrisever personal page
 Fehmi Tanrisever