Session 5: Supply Chain Finance – Chair: Arun Chockalingam
Shaunak Dabadghao (Eindhoven University of Technology) – Valuing Optimal Switching Options
The contribution of this paper is extending the Moving Boundary Method to tackle the optimal-switching problem. The Moving Boundary Method has been successfully applied to optimal-stopping problems. Optimal-switching problems can be thought of as sequences of optimal-stopping problems and possess complicating features, making an extension of the Moving-Boundary Method to tackle such problems non-trivial. The method is then applied to problems in the sourcing and energy domains.
Isik Bicer (Erasmus University Rotterdam) – The value of vertical integration under operational and financial considerations
Seizing direct control of upstream activities in a supply chain through vertical integration can help companies to reduce their production lead times and to improve their flexibility to adjust production orders. However, the high investment costs of vertical integration financed by debt also increase the financial leverage of those companies, leading to a higher bankruptcy risk. We analyze the trade-off between the operational improvement and the financial leverage, and price the value of vertical integration under both operational and financial considerations. This paper is the first attempt to quantify the long-term value of lead-time reduction and order-adjustment flexibility under bankruptcy risk given the evolution of demand forecasts. We provide analytical expressions for the value of equity and long-term debt as functions of the working capital level, the production lead time, and short- and long-term debt payments. We also develop a dynamic programming (DP) model to determine the value of order-adjustment flexibility. We find that whether the investment is financed by debt or equity may change the optimal investment selected from a menu of alternatives. Furthermore, the flexibility to update orders only slightly improves the returns to equity holders, so the benefits of vertical integration can mainly be attributed to lead-time reduction.
Luca Gelsomino (Windesheim University) – Integration of logistics and finance: evidences from Europe
Outsourcing of logistics operations is, nowadays, common practice. With the significant evolution of Supply Chain Management, providers of logistics services have developed significant know-how in managing product and information flows across supply chain that now constitute their core competitive advantage. However, the last 5 to 10 years have modelled a new economic and financial landscape that, through a reduction of access to finance and liquidity, has created extreme stress on companies and consequent pressure towards working capital reduction. Among other outcomes, this has led to the development of Supply Chain Finance (SCF) solutions, which aim at optimising the management of financial flows through collaboration among supply chain partners. Although it might seem straightforward that Logistics Service Providers (LSP) would take the lead in providing inventory-oriented SCF solutions to their customers, evidence of this happening are still extremely scarce. The aim of this contribution is to analyse, through multiple cases, relevant and insightful SCF solutions offered by LSPs in Europe. Moreover, we provide insights on the main variables that might affect the adoption of such solutions by LSPs, such as relationship and collaboration with financial institution, business context uncertainty and knowledge specificity.