Journal
EUROPEAN JOURNAL OF OPERATIONAL RESEARCH
Volume 242, Issue 3, Pages 842-853Publisher
ELSEVIER SCIENCE BV
DOI: 10.1016/j.ejor.2014.10.052
Keywords
Supply chain management; Supply chain finance; Reverse factoring; Payment delays; Simulation
Funding
- DINALOG, the Dutch Institute for Advanced Logistics
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Reverse factoring a financial arrangement where a corporation facilitates early payment of its trade credit obligations to suppliers is increasingly popular in industry. Many firms use the scheme to induce their suppliers to grant them more lenient payment terms. By means of a periodic review base stock model that includes alternative sources of financing, we explore the following question: what extensions of payment terms allow the supplier to benefit from reverse factoring? We obtain solutions by means of simulation optimisation. We find that an extension of payment terms induces a non-linear financing cost for the supplier, beyond the opportunity cost of carrying additional receivables. Furthermore, we find that the size of the payment term extension that a supplier can accommodate depends on demand uncertainty and the cost structure of the supplier. Overall, our results show that the financial implications of an extension of payment terms need careful assessment in stochastic settings. (C) 2014 Elsevier B.V. All rights reserved.
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