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

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.

Automated summary

There is substantial evidence that payment delays have negative effects on suppliers' working capital and the efficiency of the entire supply chain, and can even lead to bankruptcy for suppliers with limited capital. This study investigates supply chain finance as an innovative solution to address this issue. By establishing a multi-cycle model, the authors identify the conditions under which extended payments impact the supply chain's cash flow and shareholder value. The numerical analysis not only confirms the findings but also provides practical insights for practitioners.