Supply Chain Finance: Definition, Modern Aspects and Research

Challenges Ahead

Georgios L. Vousinas1

Please cite as:

Vousinas, Georgios (2019): Supply chain finance: definition, modern aspects and
research challenges ahead. In Tate, Wendy/ Bals, Lydia/ Ellram, Lisa (2019): Supply
Chain Finance: Risk Management, Resilience and Supplier Management, Kogan Page,
63-95.
ABSTRACT

Supply Chain Finance (SCF) is a relatively recent thinking in Supply Chain

Management (SCM) literature. Major Interest in SCF has steadily increased since the
past decades and especially during the global financial crisis of 2008. However, SCF
places the focus of research on the interconnection among SCM, corporate value and
financial performance, away from the myopic perspective of managing solely the cost
when studying financial aspects of SCM. Despite the crisis-related research interest and
the growing importance of SCF, academic contributions on the subject remain vague,
while scarce research efforts have been identified toward the systematic documentation
of its core concepts. This chapter aims to redefine the term SCF by shedding light on
theoretical ambiguities, provide an up-to-date systematic literature review of the SCF
concept and identify research gaps. The goal is to also highlight emerging areas like the
“Supply Chain Financial Bullwhip Effect” and Blockchain Technology.

INTRODUCTION

Supply Chain Finance (SCF) is a scientific discipline in its infancy, which has emerged
in Supply Chain Management (SCM) literature and gained further acknowledgement
and interest from researchers mostly due to the global financial crisis of 2008 and
financial turmoil it entailed (eg Klapper, L.F. and Randall, D., 2011; Wuttke et al.,
2013; Coulibaly et al., 2013). Nevertheless, SCF indicates a justified refocusing of
research in the interconnection and relationships between SCM, financial performance
and corporate value, far beyond the narrow-minded approach of cost reduction when
analyzing financial aspects of SCM.

Introducing schemes and instruments of corporate finance to work towards

more effective SCM, by means of enhancing collaboration among Supply Chain (SC)
partners and financial institutions (eg, better financing terms, new methods of funding

1
Geogios Vousinas is a doctoral researcher at National Technical University of Athens, School of
Mechanical Engineering, Sector of Industrial Management & Operations Research, Greece.

1
etc.), is an imperative for success. Despite the crisis-enhanced research interest and the
growing importance of SCF, academic contributions and discourse on the subject
remain fragmented and general in nature. At the same time, few research efforts have
systematically documented the core concepts and formative elements of SCF.

This chapter aims to redefine the term SCF by shedding light on theoretical
ambiguity, providing a systematic literature review of the SCF concept by exploring
both theoretical and empirical research contributions, and identifying grey research
areas. The goal is to also highlight emerging areas like the “Financial Bullwhip Effect”
and technological innovation such as blockchain applications.

SUPPLY CHAIN FINANCE (SCF)

The birth of the term Supply Chain Finance

Before considering the concept of SCF, it is essential to understand the broader concept
of SCM and acknowledge the main developments that are shaping the way that both
physical and financial supply chains are managed. SCM is well established within large
organizations and offers competitive advantage in terms of reducing the cost of goods
and simultaneously improving customer service.
Traditionally SCM was referred to as the functions of logistics, transportation,
purchasing and supplies (eg, Tan et al.,1998; Oliver and Webber,1982). However, the
evolution of SCM has shifted the focus to different aspects of SCM such as the issues
of integration (eg, Pagell, 2004; Frohlich and Westbrook, 2011), risk management (eg,
Ellis et al., 2011; Boone et al., 2007), sustainability (eg, Wieland et al., 2016; Seuring
and Müller, 2008) and optimizing working capital (eg, Preve and Sarria-Allende, 2010;
Shin and Soenem, 1998).

In today’s globalized business environment, which is characterized by high

levels of competition, firms around the world struggle to find ways to cut costs while
maximizing the efficiency of their working capital so as not to fall behind the current
market developments and ensure their viability. The concept of SCF is one of the most
promising tools for financing firms and has its roots back in the early ‘80s in the
automobile industry. However, it did not really take off until after the burst of the recent
economic crisis when it became widely used for businesses of all types and sizes.

2
 More specifically, the most important factors that led to the development of the
SCF are:

The global financial crisis of 2008. This crisis had its roots in the US subprime
mortgage crisis of 2007, and put the bargaining power of businesses at a
disadvantage with the banks when trying to acquire funds (Das, 2010). The
global financial landscape changed with the failure of several large financial
institutions and subsequent government intervention to prevent imminent
collapse. The lack of trust and uncertainty led to disruptions in the short-term
funding markets and bank credit shocks. These shocks were transmitted from
the financial sector to the real economy, via the existing transmission channels,
further squeezing the available funds (Vousinas, 2013). As a result, the
participants in SC were forced to find new ways of financing their business
objectives.

The changing level and position of inventory maintained by businesses.

Inventories exist throughout the supply chain and flow as raw materials,
components, semi-finished goods, products in transport or as final products
ready for delivery to the customer. These inventories, however, are a source of
cost for the company, as they tie-up a substantial part of its available working
capital, making it less responsive to the volatility of market demand.
Organizations now want the inventory to be held in the early stages of SC, ie,
in the hands of the supplier.

Globalization of the economy. There are several issues that characterize

financial transactions on a global scale. These include exchange costs, costs and
delays due to increased bureaucracy, import and export tax and related issues.

Rapid technological development. This has a direct impact on consumer needs,

and this is reflected in a shift in consumer preferences toward more personalized
products. This translates into a change in the production process from traditional
economies of scale to more customized production. In this direction, the
automation of the full procure-to-pay (account-payables) and order-to-cash
(account-receivables) cycles has enabled event-trigger (a triggering event is a
tangible or intangible barrier or occurrence that, once breached or met, causes

3
 another event to occur)2 financing services. For instance, a pre-shipment
financing discussion can be triggered by an order confirmation.

Regulatory changes. These changes have favored the emergence of SCF over
traditional trade finance solutions. The Basel II Capital Accord requires a
minimum duration of one year for loans and a focus on counterparty risk rather
than performance risk, while Basel III rules emphasize liquidity issues, leading
to a reduction in the credit supply provided by banks (Vousinas, 2015). By
reducing overall counterparty risk and providing a new secured method of
financing, SCF represents a lighter capital strategy than other traditional
instruments.

Relevant incentive programs. Programs issued by government authorities in

favor of SCF. Most notable of these programs is the US SupplierPay Initiative,
which was launched in 2014, following the success of the corresponding Supply
Chain Finance initiative in the UK3. It is a pledge signed by numerous private
sector companies, with the goal of helping smaller suppliers access working
capital at a much more affordable rate.

Defining Supply Chain Finance

In the modern globalized economy, which is characterized by high levels of competition

and harsh financial conditions, firms are engaged in an endless fight to cut costs while
struggling to gain access to the funds required in order to achieve their business goals.
The globalization of supply chains, with multinational buyers on one hand and a diverse
group of suppliers in numerous countries on the other, is creating pressure to unlock
the trapped working capital inside their supply chains. The main task of SCF is to
reduce the capital cost by means of integrated relationships of partners and advanced
financing activities in supply chains.

Supply Chain Finance (SCF) can be defined as the use of financial instruments,
practices and technologies for optimizing the management of the working capital and
liquidity tied up in supply chain processes for collaborating business partners - the

2
Available from: https://www.investopedia.com/terms/t/triggeringevent.asp, Accessed 15.2.2018.
3
Available from: https://www.sba.gov/about-sba/sba-initiatives/supplierpay-initiative/supplierpay-
case-studies, Accessed 15.2.2018.

4
buyer, the supplier and the financing institution (EBA, 2014). Figure 1 introduces the
SCF “pyramid” in order to offer a brief, simplified view of the parties involved and the
related flows and to serve as a reference for future research:

Figure 1: The SCF “pyramid”

Source: Author’s design

There exist numerous financial instruments which fall under the scope of SCF
(as further analyzed in the next section), with the most common being Reverse
Factoring (RF)4, as seen in Figure 2:

Figure 2: Varieties of SCF instruments

4
Reverse Factoring is a financing solution that has been initiated by the ordering parties to help their
suppliers secure financing of receivables at favorable terms (Lekkakos S.D. and Serrano A., 2016).

5
Source: Adapted from EBA (2014)

There is some confusion between SCF and RF, because historically RF is the most
widely used way of applying the SCF and the link among them is indisputable, but the
two concepts are not identical, as made clear by the above figure. In Figure 3, the
“circuit” of SCF is presented, via the lens of the operation of the most common SCF
instrument ie Reverse Factoring, to provide a simplified illustration of the basic flows
and the parties involved:

Figure 3: The “circuit” of SCF

6
 Source: Author’s design

The main focus in the SCF approach is on taking an inter-company view of

financial flows with customers, suppliers and service providers to better share the risks
and value of financial flows among the supply chain members (Pfohl and Gomm, 2009).
As suppliers suffer due to delayed payments which squeeze liquidity and negatively
affect their cash conversion cycle (CCC)5, they rely on short-term borrowing, at rates
which are higher than those the buyer could attain, in order to be able to have sufficient
working capital for operations. Further, because these additional costs tend to find their
way back to the buyers later in terms of higher pricing or reduced service, the buyers
have the incentive to reduce these costs by helping their major suppliers get better terms
(lower lending rate, discount policies etc.).

Following the global financial crisis of 2008 and the severe negative impact on
economic conditions, the management of working capital has become critical due to the
prolonged cash flow cycle time from procurement to sales. Firms are seeking an
appropriate financing method of their own as well as with their trading partners, but the
conflicting goals among buyers and suppliers increase the complexity to create a

5
Cash Conversion Cycle or Cash-to-Cash cycle is the length of time it takes for a company’s
investment in inventory to generate cash, considering that some or all of the inventory is purchased
using credit.

7
mutually beneficial process. The buyers on one hand wish to delay payments for their
specific financial situations and the suppliers on the other desire accelerated collections.
The solution comes with the application of SCF tools, which help build a “circle of
trust” among the involved parties (buyers – suppliers - banks) and set the framework
for a win-win situation through simple and fast payable processes.

The SCF instruments

The instruments utilized in SCF (as previously mentioned in Figure 2) include the
following, which are discussed in the paragraphs below.

 The Funding of Receivable Finance, the main sub-category of which is Reverse

Factoring.
 Dynamic Discounting
 Inventory Financing
 Purchase Order Financing

Reverse Factoring

Reverse Factoring (RF), also often called approved payables finance, has gained
considerable ground compared to the traditional Factoring method (centered on selling
receivables) and has received considerable recent interest from both the academic and
the business community (e.g., Iacono et al., 2015; Wuttke et al, 2013). RF is an
arrangement through which a buyer, with the help of its financier, offers a supplier
credit against the credit rating of the buyer for the period of the payment term (Demica,
2007). The bigger the difference in creditworthiness between buyer and supplier, the
more a supplier will enjoy lower short-term financing costs. Real-time information
about transactions in the RF arrangement is provided by electronic platforms.
In its simplest form, RF includes a buyer, a supplier, a banking institution and
a web platform for coordination, often hosted by the bank. In this process, the vendor
delivers the requested raw material order to the buyer, and then, after validating and
approving the receipt of the agreed materials and the invoice from the supplier, the
electronic invoice is placed on the platform. Then the supplier has the right to receive
the value of the order directly from the bank, minus a small percentage representing the
bank's fee and interest cost of receiving before the negotiated payment dates.

8
Subsequently, after a predetermined length of time, the buyer is obliged to pay the bank
the full value of the goods he has received. The following figure gives a description of
the main transactions between key participants in an RF program as mentioned above.

Figure 4: The reverse factoring mechanism

Source: Author’s design

RF yields benefits to all the involved parties; thus it is considered to be a win-

win approach (eg, Hurtrez and Salvadori, 2010; Seifert and Seifert, 2011). Major
benefits include the following (Klapper, 2006):
 The main advantage of RF is that the credit risk of the suppliers is equal to the
default risk of the high-quality customers. The usage of RF allows high-risk
suppliers to mitigate their credit risk level with that of their high-quality buyers,
thus allowing them to reduce their cost of debt, while increasing their level of
access to liquidity.
 Another advantage of RF is that it provides benefits to both banking institutions
and buyers. As in many countries RF is offered by banks, such a case enables
lenders to develop strong relationships with small and medium-sized firms –

9
 SMEs, separate from the existing high-quality customers, without taking on
additional risks. This offers cross-selling opportunities and allows banks to
create a credit history of SMEs which may lead to further future lending.
 The large buyers may also benefit from better negotiation terms. For example,
buyers may be able to extend the terms of their accounts payable from 30 to 60
days. Even more, the buyer may benefit from outsourcing its own payables
management (eg. the buyer can send a payment to one lender rather than many
small suppliers).

Dynamic Discounting

Dynamic discounting (DD) is a technology-enabled solution for companies to capture

and automate discounts to their entire supply chain. DD gives buyers more flexibility
in order to select how and when to pay their suppliers in exchange for a lower price or
discount for the goods and services purchased. The “dynamic” component refers to the
choice to provide discounts based on the dates of payment to suppliers, and usually the
earlier the payment is made, the greater the discount.
For example, if a buying organization sets the annual rate charged for borrowing
by the supplier (the annualized percentage rate - APR) at 18%, and the supplier wants
to be paid 30 days earlier (30 days acceleration of payments) than the original net due
date, the incremental discount would be 1.5% (18% APR / 360 days = 0.05% * 30 days
acceleration = 1.5% discount). The point here is that the discount percentage changes
on a sliding scale according to the APR set by the buying organization and how early
the supplier wants to get paid.

DD enables buying organizations and their suppliers to initiate early-pay

discounts on an invoice-by-invoice basis and allows both parties to view invoices
through a web-based platform and select approved invoices for early payment. The
main benefit of dynamic discounting is the fact that the buyers can use their own
balance sheet or excess cash to generate additional purchasing discounts, while the
sellers benefit by both reducing working capital and being able to get paid earlier.

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Inventory Financing

Inventory Financing is a line of credit or short-term loan made to a company so it can

purchase products for sale6. Those products, or inventory, serve as collateral for the
loan if the business does not sell its products and cannot repay the loan. Inventory
financing is especially useful for businesses that must pay their suppliers in a shorter
period of time than it takes them to sell their inventory to customers.

Purchase Order Financing

The term Purchase Order Financing refers to a short-term commercial finance option
that provides capital to pay suppliers up-front for verified purchase orders. Businesses
avoid depleting cash reserves or declining an order because of cash flow challenges. It
allows companies to accept unusually large orders and adjust the loan basis up/down
quickly to meet needs7.

Today, banks have managed to identify those elements that are necessary in
order to better address their customers’ SC needs through proper business tools
provided by SCF, such as DD, electronic payment platforms and SCF. These financing
tools offer increased transparency and predictability of payment receipts and
disbursements, which in turn reduces the required liquidity, thus improving their capital
adequacy ratios (the capital adequacy ratio - CAR is a measure of a bank's capital and
is expressed as a percentage of a bank's risk weighted credit exposures).8 Thus, these
tools are of major importance in support of the application of the stricter rules of Basel
III (fully operational from 2019), in terms of liquidity (Vousinas, 2015).

Modern issues in SCF

It is common knowledge among the research community and companies worldwide

that SCF and its tools provide critical support towards the achievement of efficient
supply chains, and supply chain cash flows and financing costs in particular. And as

6
Available from: https://www.investopedia.com/terms/i/inventory-financing.asp, Accessed 15.2.2018.
7
Available from: https://www.purchaseorderfinancing.com/po-finance/what-is-purchase-order-
financing/. Accessed 15.2.2018.
8
Available from: https://www.investopedia.com/terms/c/capitaladequacyratio.asp. Accessed
15.2.2018.

11
mentioned before, the ever-growing importance of SCF has been attributed mainly to
the financial crisis of 2008 and the subsequent recession. This crisis, along with rapid
technological change in modern globalized economic environments, has brought up a
number of major issues and challenges to be addressed, which are discussed below.

In day-to-day business operations, supply chains are mostly optimized and monitored
for physical throughput, with the financial flows handled reactively and at transactional
level. But under crisis conditions this can change both suddenly and dramatically when
managers have to deal with the growing necessity to secure the smooth financial
operation of their companies through short-term working capital management
measures, such as reducing the level of inventories or improving the collection
timeliness, thus impacting the physical material flows (Udenio et al., 2015).

The “Supply Chain Financial Bullwhip Effect”

Following the bust created by the recent global financial crisis, which caused
disruptions in the funding markets and in the financial flow level of supply chains,
companies were forced to reduce their working capital targets, as well as find new forms
of financing their business plans, causing a substantial shock in the supply chains across
the world, thus creating both an inventory-driven bullwhip effect and a financial
bullwhip9.
The bullwhip effect or Forrester effect (Forrester, 1961) describes the
phenomenon of the increasing propagation of operational volatility from bottom to top
along a supply chain that mainly refers to inventory and order flows (Lee et al., 1997).
While the previous supply chain research has focused on the bullwhip effect of physical
material flows, the existing bullwhip in financial flows (“financial bullwhip”) has been
neglected and until now there was no clear effort to describe and provide an explanation
of this phenomenon in the SCM universe. When the transmission channels of shocks
between financial sector and the real economy, especially the liquidity channel
(Vousinas, 2013), result on the amplification of financial disturbances across SC, then

9
The term “financial bullwhip” has been explored by Chen et al. (2013) on bondholders’ wealth along
a supply chain by examining whether the internal liquidity risk effect on bond yield spreads becomes
greater upwardly along the supply chain counterparties.

12
we can refer to the phenomenon of the “Supply Chain Financial Bullwhip Effect”
(SCFBE).

The SCFBE can be defined as “a phenomenon on the financial flow level of

a supply chain which involves the increasing amplification of financial distortion
along it”. Essentially, the SCFBE occurs when there exists an oscillation in the
financial flows from the financing institutions, due to various factors (internal &
external), causing cash flow fluctuations and financial distress at micro (firm) as well
as macro (economy) level. The related financial flows are reinforced under crisis
conditions, when the transmission channels of shocks between financial sector and real
economy result in the amplification of financial disturbances along the entire SC. The
SCFBE is a phenomenon that occurs at both micro and macro level, as the financial
flow disruptions pass through the economy to the firm level and affect severely the SC.
So, the primary goal is to examine how the burst of a financial crisis can lead to a
financial bullwhip effect along the entire SC (via the transmission channels), placing
the focus on the related financial flows, at both macro and micro level, justifying the
existence of the SCFBE.

There is limited research that addresses the SCFBE across global supply chains.
Further research and related case studies must be conducted toward this direction in
order to fill the existing gap and broaden our understanding regarding SCF.

Financial Technology (FinTech)

Financial technology or “FinTech” refers to the use of technology to deliver financial

solutions. The term’s origin can be traced back to the early 1990s and was the original
name of the Financial Services Technology Consortium, a project initiated by Citicorp,
a predecessor to today's Citigroup, so as to facilitate technological cooperation efforts10.
Originally, the term applied to technology used at the back-end of established
consumer and trade financial institutions. But since the end of the first decade of the
21st century, the term has expanded to include any technological innovation in the
financial sector, including retail banking and distributed ledger technologies like
blockchain.

10
Available from: https://www.americanbanker.com/opinion/fintech-the-word-that-is-evolves.
Accessed 15.2.2018.

13
Blockchain Technology
One promising FinTech innovation regarding SCF is the emergence of blockchain (eg,
Kakavand et al., 2017; Camerinelli, 2016; Peters et al., 2016). Blockchain is one type
of a distributed ledger. Distributed ledgers (DL) use independent computers - referred
to as nodes - to record, share and synchronize transactions in their respective electronic
ledgers, instead of keeping data centralized as in a traditional ledger11. While
blockchain was born with Bitcoin12, it can be applied into many diverse applications
far beyond cryptocurrency.
In essence, a blockchain is a public ledger that contains information on every
transaction made using the blockchain technology. A blockchain system is not based
on trust but instead on cryptographic proof, which allows conduct of direct transactions
between to consenting parties instead of trusting a centralized institution, such as a
bank, to handle the transaction (Nakamoto, 2008). This kind of technology can be used
for information sharing, monitoring and tracking assets and executing long-term
contracts. Further developments in this technology have allowed the running of small
programs (ie smart contracts), which potentially enable trusted automation of
contractual relations between trading parties (Hofmann et al., 2017).
Since blockchain allows all kind of payments to be completed without any bank
or other intermediary, integrating blockchain with SCF can save both cost and time, as
well as improve business efficiency. For example, Camerinelli (2016) suggests that at
least one-third of the most common SC processes could strongly benefit from the
features offered by blockchain.
The emergence of blockchain systems has a huge potential impact on traditional
financial and business services. Peters et al. (2016) discussed that blockchain has the
potential to disrupt the world of banking. Blockchain technology has also been
proposed as an innovative solution to areas such as clearing and settlement of financial
assets, payment systems, smart contracts, operational risks in financial markets and so
on (Kakavand et al. 2017). Besides, Morini (2016) showed that there are real business
cases like collateralization of financial derivatives that could leverage blockchain to
reduce costs and risks. Blockchain has also caught the attention of large software

11
Natarajan, Harish; Krause, Solvej Karla; Gradstein, Helen Luskin. 2017. Distributed Ledger
Technology (DLT) and blockchain (English). FinTech note; no. 1. Washington, D.C. : World Bank
Group. Available from: http://documents.worldbank.org/curated/en/177911513714062215/Distributed-
Ledger-Technology-DLT-and-blockchain. Accessed 15.2.2018.
12
Bitcoin: A peer-to-peer electronic cash system. Nakamoto, S. (2008).

14
companies, seen in the fact that Microsoft Azure13 and IBM14 are beginning to offer
Blockchain-as-a-Service.
Of course, the potential benefits of this technological innovation are difficult to
assess, while the related research is still at its infancy. However, in the near future it
might create great opportunities for all the involved parties in SC and bring a whole
revolution in the existing SCF practices.

LITERATURE REVIEW
Methodology

After analyzing the main drivers behind the emergence of SCF, the clarification of the
term and the main SCF tools, also offering a brief view of some existing challenges, a
review of selected referred journal articles follows to gather and analyze systematically
the recent developments in the field. By scrutinizing both theoretical and empirical
literature and placing emphasis on the contemporary aspects of SCF in terms of
collaboration among companies, suppliers and financing institutions, not only are
problematic areas identified, but also useful conclusions come to surface and certain
suggestions are proposed.
This review explores research papers which deal with the broad concept of SCF
in terms of theoretical - conceptual framing as well as empirical analysis and practical
implications. The time span examined is 2000 - 2016 in order to cover the most up-to-
date articles and due to the fact that the prior period (1985 - 1999) only provided
scattered research. The time focus can also be attributed to the fact that the rise of the
SCF discipline is considered to have started at the beginning of the 21st century (eg,
Hofmann, 2005; Pfohl and Gomm, 2009). It must be pointed out that articles which
analyze the topic of Financial Supply Chain Management (FSCM) were also included
in the review process provided that there was no clear distinction among the latter and
SCF.
The selection methodology followed a three-step process as described below.
First of all, the research utilized Scopus, the world’s largest abstract and citation
database of peer-reviewed literature, containing scientific journals, books and

13
Microsoft azure: Blockchain as a service. Available from: https://azure.microsoft.com/
en-us/solutions/blockchain/, 2016. Accessed 15.2.2018.
14
IBM blockchain. Available from: http://www.ibm.com/blockchain/, 2016. Accessed 15.2.2018.

15
conference proceedings. The search was conducted by using the keywords “Supply
Chain Finance” and “Financial Supply Chain” found in both the abstract and in the
main body of the returned papers. For purposes of scientific validity conference
proceedings were excluded from the selection process.
Only papers from the major SCM and Financial Management scientific journals
such as International Journal of Physical Distribution and Logistics Management,
Journal of Purchasing and Supply Management, Business Process Management Journal
and Journal of Business Research were included. In order to select from the returned
articles, an in-depth analysis for possible inclusion to the final pool was performed.
The main criterion was papers published (not exclusively) in top-listed journals from
each of the two examined fields ie, SCM and Finance, based on the SCImago Journal
Ranking Index. The entire list of journals is shown in Table 1.

Table 1: List of Journals

No. of Authors
No Name
articles
Accounting, Organizations and
1 1 Baiman S, & Rajan (2002)
Society
International Journal of Logistics:
2 1 Gomm (2010)
Research and Applications
Lambert and Burduroglu,
The International Journal of
3 2 (2000); Lambert and Pohlen
Logistics Management
(2001)
International Journal of Productivity
4 1 Shepherd and Günter (2006)
and Performance Management
Supply Chain Forum: An
5 1 Ceccarello et al. (2002)
International Journal
Production and Operations
6 1 Hendricks and Singhal (2005)
Management
International Journal of Services and Smith and Buddress (2005);
7 2
Operations Management Grosse-Ruyken et al. (2011)
Farris and Hutchison (2002);
International Journal of Physical
8 3 Iacono et al. (2015); Randall
Distribution & Logistics Management
and Farris (2009)
Journal of Applied Corporate
9 1 Billington (2002)
Finance
10 International Commerce Review 1 Seifert and Seifert (2011)
Hofmann and Kotzab (2010);
11 Journal of Business Logistics 2
Wuttke et al. (2013)

16
 Supply Chain Management: An Blackman et al. (2013); Chae
12 2
International Journal (2009)
Business Process Management
13 1 More and Basu (2013)
Journal
Journal of Purchasing and Supply Costantino and Pellegrino,
14 1
Management (2010)
Journal of Payments Strategy and 1
15 Camerinelli (2009)
Systems
16 Journal of Business Research 1 Wagner (2006)
17 Communications of the IBIMA 1 Fellenz et al. (2009)
International Journal of Business 1
18 More and Babu (2009)
Innovation and Research
Journal of Supply Chain
19 Management: A Global Review of 1 Elmuti (2002)
Purchasing and Supply
Total number of articles 25

Second, from all the identified papers, which were thoroughly studied, only those
with a close possible relevance to the SCF discipline were selected, discarding those
that mentioned the term only in the abstract / introductory sections or fragmented to
support auxiliary research. This criterion produced a total of 145 papers for deeper
analysis. The primary points of focus for inclusion of a paper were:
1. Conceptual frameworks – Financial aspects. Examining papers which develop
general frameworks or concepts regarding the SCF discipline, but focusing on
the “financial dimension” rather than the SC.
2. Performance Measurement - KPIs. Referring to articles which deal with the
financial performance measurement issues, ie the usage of SCF metrics and Key
Performance Indicators (KPIs) to quantify firms’ financial performance.
3. Empirical Studies. Containing empirical papers such as case studies, surveys
etc. which employ empirical data to address the implementation of SCF
instruments (market view).
In conclusion, a total of 25 papers were finally chosen to be studied in detail and
included in the final set of articles, with the primary purpose of offering the most up-
to-date research on the field of SCF, both from theoretical and market views.

17
Conceptual frameworks – Financial Aspects
Conceptual articles usually present general frameworks or concepts regarding SCF. The
focus of the selected reviewed papers in this section is put on defining the scope of SCF
application, the objectives, the actors involved, or the levers that can be exploited.
Hofmann (2005) presents a holistic view of the financial supply chain,
emphasizing that operating and financial activities are interdependent and closely
connected. According to Hofmann (2005), SCF is based on the following three
constitutive elements:
- Institutional actor: it can be only a business actor in supply chain and/or
involve financial institution, private investor and government.
- Characteristic of SCM, regarding regulations for cooperation in supply chain
systems such as contract regulation, financing system, pricing policy, etc.
- Financing function: types of utilization of financing such as for investment,
operational capital, goods supplying, marketing, etc.
Only considering operational or financial activities alone is sub-optimal, as there are
benefits in collaboration and alignment between them. The author also emphasizes that
even when considering institutions, financial functions and instruments of supply
chains in collaboration, SCF is still part of a more complex system.
Camerinelli (2009) considers the SCF approach as a set of financial solutions,
very often provided by financial institutions. The financial component, expressed
through invoices and payments, acts as the 'glue' between the various participants. In
such a context, control passes from corporates to the issuing institutions, ie the banks,
which also find themselves in difficult conditions owing to the serious economic crisis
and having to deal with an ever more competitive market. By mapping the operational
processes in front of these as well as other financial solutions, the SC manager can
guide the finance colleague proactively to involve the bank of reference to obtain
solutions and services that positively condition the corporation's working capital.
A framework for investigating the financial issues in logistics and SCM is
proposed by Gomm (2010) which shows that taking a supply chain perspective on
financial issues offers great opportunities for SCM professionals. SCM can not only
contribute to improvements in sales, cost of sales, and the invested capital, but also has
the potential to improve the capital cost rate as a long-neglected supply chain driver of
shareholder value.

18
 Regarding collaborative SCF (Baiman and Rajan, 2002) there are two special
aspects to consider, each of them illustrated by a short case. First, investments in supply
chain collaborations mean that the participants jointly invest in objects that would
otherwise be outside their individual organization’s scope of consideration. The number
of investment alternatives therefore increases. A financial collaboration with the
company’s most important supplier offers a new investment alternative: Jointly
investing in the supplier’s distribution warehouse might potentially enhance the
organization’s procurement process even more. Second, the best investment alternative
now is the one delivering the highest value to all collaborating parties. This entails
considering the cash flows of all participants when deciding about different alternatives.
The opportunities of collaborative investment activities (eg, incremental capital
expenditure), collaborative debt management, and ways to collaboratively influence the
costs of capital (Weighted Average Cost of Capital - WACC), represent areas for
further improvement that should be thoroughly researched in future studies.

Performance measurement - KPIs

The short-term objectives of SCF are primarily to increase productivity and reduce
inventory and cycle time via effective working capital management, while long-term
objectives are to increase market share and profits for all members of the SC. The usage
of SCF metrics (e.g. CCC, Days Payables Outstanding - DPO15 and Days Sales
Outstanding – DSO16) along with KPIs can serve as a tool for evaluating an
organization’s financial behavior and performance over time, a critical factor for the
successful implementation of SCF solutions. The aim of this section is to shed light on
the existing research addressing the financial performance measurement issues from
the SCF view.
Logistics managers must measure and sell the value created by logistics to
customers, SC partners and their top management and reviewed methods of measuring
the value of logistics such as customer value-added, strategic profit model (SPM) and
Economic Value Added – EVA (Lambert and Burduroglu, 2000). In a similar way,
most of the performance measures called SC metrics are just logistics measures with an
internal focus, unable to capture how the firm drives value and profitability in the

15
Available from: https://www.investopedia.com/terms/d/dpo.asp. Accessed 15.2.2018.
16
Available from: https://www.investopedia.com/terms/d/dso.asp. Accessed 15.2.2018.

19
supply chain (Lambert and Pohlen, 2001). Therefore, they proposed a framework for
developing SC metrics that translates performance into shareholder value using the
EVA method.
One main problem lies in the measurement gap between the more engineering-
driven SCM and the economists’ approach. In a European study (Ceccarello et al.,
2002), which used the Supply Chain Operations Reference (SCOR) model (a process
reference model developed and endorsed by the Supply Chain Council as the cross-
industry, standard diagnostic tool for SCM17) to benchmark days of inventory,
receivables, payables, return on investment and asset turnover, and the level of
integration and collaboration, significant impacts were found from SCM practice and
these five evaluated financial indicators. The results of the study were on the impact of
SCM on overall organizational effectiveness, so as to identify problems that affect SCM
success. Results showed that organizations generally considered themselves as
successful at managing their supply chains and achieving significant improvement in
organizational performance, yet they have not reached the order of magnitude of
improvements ascribed to SCM (Elmuti, 2002).
Addressing the dearth of research into performance measurement systems and
metrics of supply chains, a critical review of the contemporary literature and possible
avenues for future research are suggested (Craig Shepherd and Hannes Günter, 2006).
Their chapter provides a taxonomy of performance measures and argues that despite
considerable advances in the literature in recent years, a number of important problems
have not yet received adequate attention, including the factors influencing the
successful implementation of performance measurement systems for supply chains, the
forces shaping their evolution over time and, the problem of their ongoing maintenance.
Randall and Farris (2009) used a case-based approach to demonstrate how SCF
management techniques, such as cash-to-cash cycle (C2C) and shared that weighted
average cost of capital (WACC), can reduce the financial costs experienced by a supply
chain. The findings provide a methodology to identify and quantify the potential
opportunities to increase profitability throughout the supply. Scenarios are offered that
illuminate potential SC improvements gained by collaborative management of cash-to-
cash cycles and sharing WACC with trading partners. The impact is reduced overall

17
Supply Chain Operations Reference Model. Supply Chain Council. October 7, 2004.
Available from: https://www.apics.org/apics-for-business/frameworks/scor. Accessed 15.2.2018.

20
cost generated by leveraging the financial strength of the entire supply chain. They also
emphasize the fact that during economic downturns and times of tight credit,
proactively managing financials across the supply chain may be the only way some
suppliers remain afloat.
At a macro-level, the association among supply chain glitches and financial
operating performance was analyzed, with the usage of a sample of 884 glitches
announced by publicly traded firms and tested against a sample of control firms of
similar size and industries (Hendricks and Singhal, 2005). On average, the glitches lead
to 6.92% lower sales growth, 10.66% higher growth in costs and 13.88% higher growth
in inventories.
Chae (2009) highlights the need for the development of KPIs for the purposes
of measuring and monitoring SC performance. He seeks to offer a practical approach
to performance measurement and to present a list of KPIs. This paper offers insights
from industry in the area of SC performance measurement and a practical approach to
developing performance metrics. It concludes that companies should focus on only a
small list of KPIs which are critical for their operations management, customer service
and financial viability.
In the context of working capital management, several papers approach the
analysis of SCF benefits from the point of view of the cash conversion cycle. CCC is
considered a powerful performance metric for assessing how well a firm manages its
working capital (Preve and Sarria-Allende, 2010). A firm with a lower CCC is more
efficient because it turns its working capital over more frequently; this leads to a higher
return on capital employed (ROCE). Reducing CCC lowers the amount of capital that
is tied up in the supply chain and raises profitability. However, reducing CCC in one
firm might have the undesirable effect of increasing the working capital for other firms
in the supply chain. Therefore, optimizing working capital from a supply chain
perspective requires ensuring a balanced CCC for all supply chain partners.
Farris and Hutchison (2002) argue that C2C metric is an important measure as
it bridges across inbound material activities with suppliers, via manufacturing
operations, and the outbound logistics with customers. It is emphasized that cash-to-
cash is a key performance indicator for the management of the entire SC.

Hofmann and Kotzab (2010) showed how a collaborative approach to cash-to-

cash cycle management leads to optimal solutions, whereas pressure to shorten

21
receivable collection and extend payable settlement times through the SC might
negatively affect the value of the organizations involved.

The contribution of the CCC as a proper measure of a firm’s performance was

examined by Grosse-Ruyken et al. (2011). The empirical results indicate a significantly
negative relationship among the CCC and return on capital employed (ROCE). The
authors argue that the optimal level of CCC for responsive supply chains must be
assessed holistically and conclude that the right working capital management depends
on the business model, its specific supply chain design configurations, and risk aspects
within the supply chain. A model is used to capture the interaction among firms’
operations decisions and financial risks (Yang and Birge, 2011) which demonstrates
that, given demand uncertainty, trade credit enhances supply chain efficiency by
serving as a risk-sharing mechanism.

Empirical Studies – Market view

SCM and SCF are undergoing a vast transformation. Since the average cost of
purchased materials, components, and services across manufacturing firms frequently
exceeds 60% to 70% of the total cost of operations (Wagner, 2006), the effective
management of the product, information and funding flows along the entire SC is
critical. Competition among firms means competition between supply chains and
networks (eg. More and Babu, 2009; Smith and Buddress, 2005). The importance of
successful SCF has been highlighted by a variety of empirical papers (case studies and
professional surveys), as presented below, which aim to examine both the application
of SCF tools as well as the degree of market adoption of SCF.
Fellenz et al. (2009) explore current models and practice regarding the dynamics
of financial flows along global supply networks. The authors suggest that any
improvement in available liquidity from the user side, for example through more
efficient financial flows, can be useful for the system as well as for the participating
firms. Moreover, progress in developing inter-organizational systems that promote
more efficient financial flows and also provide better financial transparency and
therefore better risk assessment and management, can provide important benefits. This
research has particular relevance in the light of the disruptions that the global credit
crunch has brought to global financial systems, as it highlights clearly that changes to
the financial system are inevitable and point to areas which need to be aligned and to

22
the challenges which need to be overcome. The key issue is that change should not only
address the limitations of current systems identified through the financial crisis but
should also take into account the inefficiencies and shortcomings from operational and
technological perspectives.
A group of studies adopts the real options approach (eg, Billington et al., 2002;
Costantino and Pellegrino, 2010) in order to help decision makers to make better -
informed decisions about SC strategies and investments under uncertain conditions.
Similar to financial options, real options evaluate the benefits of managerial flexibility
and capture upside potential whilst limiting downside loss.

The necessity for a supply chain-spanning approach arises from the fact that
most firms are involved in inter-firm relationships in their supply chains and thus
depend on having stable and healthy partners (suppliers, retailers, customers, etc.). The
bankruptcy of even a single supplier in the supply chain might set off a domino effect
throughout the entire value chain. Managerial and scientific interest for SCF has grown
significantly since the recent financial crisis (Seifert and Seifert, 2011).

Through interdisciplinary and inter-firm cooperation, SCF concepts and

applications claim to offer integrated solutions to such problems. Nevertheless, the
SCM discipline itself is often surprisingly little involved in these solutions. A relatively
recent study (Pezza, 2011) indicates that the SC discipline is not involved in almost
50% of SCF programs surveyed. According to this study the impact of demand
volatility on available cash is a key factor behind these developments. Indeed, as
demand volatility calls on one hand for more safety stock investment but on the other
hand induces a desire to hold more precautionary cash, balancing these concerns may
become a challenge.

According to Wuttke et al. (2013) SCF targets the financial flow and allows
buying firms and their suppliers to improve working capital and reduce costs. In order
to close the gap between our knowledge of product and information flow-oriented
innovations and financial flow innovations along SCF, the authors opted for an
inductive multiple case study approach with six European firms. Their findings suggest
four sets of propositions and propose an extended SCF adoption framework revolving
around the interrelated adoption processes of buying firms and their corresponding
supplier bases.

23
 Blackman et al. (2013) highlight the strategic importance of SCF for business
and academic researchers by performing a detailed case study of Motorola’s global
financial supply chain. The practical implications of their research suggest that the
development of integrated financial supply chains will lead to significant savings in
terms of funding, banking and administrative costs associated with treasury and
payment activities. The implementation and nature of the strategic change also
highlight important strategic planning and implementation issues associated with
financial supply chains. The research findings and comparison with theory support the
assertion that SCF is a relatively new and unexplored problem area that is of direct
relevance and interest to researchers in SCM.
More and Basu (2013) examine the different challenges that confront SCF via
carrying out an extensive survey among Indian firms and aim to develop a hierarchical
model that analyzes the complex relationship dynamics among them. The study reveals
that lack of common vision among the SC partners is the most critical challenge
confronting SCF. Unpredictable cash flows resulting from delays in financial
transactions, due to lack of automation in the payment processes, along with lack of
knowledge and training on SCF tools, also play significant roles. As organizations are
tightly integrated through their SC, they should initiate collaborative approaches across
the SC to reduce the total procure to payment cycle time and, in the process, improve
overall financial stability of the SC. Based on this study, firms can evaluate the
dynamics of SCF challenges and redefine SC relationships and strategies to achieve
desired cash flow in the SC.
Iacono et al (2015) aimed to show that market dynamics can significantly
influence the lifecycle and value of a SCF arrangement. This was achieved by
constructing a model of market dynamics for reverse factoring, a specific type of SCF
arrangement. The following market factors are key for direct SCF benefits:
- competition
- interest rates
- receivables volumes and
- firms’ working capital goals.
The main conclusion of the aforementioned study was that reverse factoring can yield
direct benefits for all SC participants, but that these benefits are highly dependent to
market conditions.

24
Concluding remarks and research challenges ahead
As analyzed in this chapter, SCF is a relatively new scientific concept, with exponential
growth in interest from both the research and business communities, mainly driven by
the recent global financial crisis and the consequent recession, as well as rapid
technological growth. But regardless of the increased level of interest in the topic of
SCF and its undisputed value, the relevant literature is still at an early stage, while at
the same time limited research contributions have been acknowledged in the direction
of SCF standardization and development of a general theory.

The contribution of the chapter is threefold: to provide a general overview of

the SCF discipline by highlighting the major factors that led to its expansion, defining
the term and analyzing its main applicable tools, while putting the focus on modern
aspects of SCF; to offer a structured, focused and up-to-date review on the critical issues
of SCF; and to identify the existing research gaps so as to serve as a useful guide to
researchers, professionals and relevant stakeholders.
The analysis provided has identified a number of key features regarding SCF:

 The financial crisis of 2008 along with the globalization of the economy,
technological growth and regulatory changes are the main drivers behind the
development of SCF
 The most common SCF tools are RF, DD, Inventory and Purchase Order
Financing
 The transmission of shocks among the financial sector and real economy
causing the amplification of financial disturbances across SC has led to the
introduction of the term SCFBE
 Rise of FinTech and especially blockchain technology
 Different definitions and approaches of SCF
 Financial performance measurement issues are addressed by the usage of SCF
metrics and KPIs, the most common of which are the CCC and the WACC
 Case studies and professional surveys have highlighted the significance of SCF
and the need for further involvement of its tools

Given the findings of this chapter, it seems justified to predict an ever-increasing

significance and dissemination of SCF, not only stemming from and focusing on crisis
conditions and technological innovation, but also in every aspect of the modern

25
business world. However, several major challenges have been highlighted, which have
to be addressed and can be summarized to the following:

 Enhancing the theory of SCF towards standardization

 risk mitigation for all participants
 improvement of existing financial performance measurement systems
 addressing the “Supply Chain Financial Bullwhip Effect”
 technological innovation such as FinTech and automation of SCF processes
 application of blockchain technology – potential benefits (payment systems,
smart contracts, operational risks in financial market etc.)
 role of banks
 financial collaboration among SCF participants and financing institutions.
In conclusion, in spite of the crisis-driven research and the ever-growing
significance of SCF, academic contributions are limited, while few research steps have
been identified towards both the systematic documentation and the development of SCF
theory. This chapter tries to shed light on the birth and the reasons behind the emergence
of the term SCF. It also provides a structured, up-to-date literature review of the SCF
concept by scrutinizing the related research contributions, identifying grey areas and
research gaps, and exploring the market adoption of SCF instruments via relevant case
studies. Even more, the chapter offers insights on SCF hot topics (Supply Chain
Financial Bullwhip Effect and blockchain technology), thus preparing the ground for
SCF standardization and hopefully initiating a fruitful academic and professional
discourse on the subject.

26
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