Improving Service Levels through Reverse Factoring

35 Pages Posted: 23 Nov 2015 Last revised: 14 Dec 2015

See all articles by Kasper van der Vliet

Kasper van der Vliet

Eindhoven University of Technology

Matthew Reindorp

Drexel University - Department of Decision Sciences

Jan C. Fransoo

Tilburg University - Tilburg University School of Economics and Management

Date Written: December 13, 2015

Abstract

Does 'reverse factoring' - a supply chain finance solution that has recently become popular in industry - allow for operational benefits? Are the benefits automatic, or do they need to be explicitly required in the reverse factoring arrangement? We explore these questions through a periodic review inventory model of a supplier (she) that serves demands of two corporate customers, A and B. The customers have the same payment term toward the supplier and the same minimum service level requirements, but customer A (he) can offer reverse factoring. The supplier chooses her base stock policy and internal cash retention policy in order to minimize her average total cost, while satisfying the customers' service level requirements. We use simulation-based optimization to determine the optimal policies and cost. Through numerical experimentation, we find that the supplier does not automatically offer a better service to customer A, but would rather collect any financial savings resulting from reverse factoring. These savings are however large enough that customer A can require a significant service level improvement. We find that the maximum improvement depends on the initial service level requirement, the demand uncertainty, the absolute difference between the supply lead time and the payment term, and the relative size of expected demand from customer A. Our work contributes to a better understanding of the operational dimensions of supply chain finance.

Keywords: Supply chain finance, Supplier financing, Inventory management, Simulation

Suggested Citation

van der Vliet, Kasper and Reindorp, Matthew and Fransoo, Jan C., Improving Service Levels through Reverse Factoring (December 13, 2015). Available at SSRN: https://ssrn.com/abstract=2694242 or http://dx.doi.org/10.2139/ssrn.2694242

Kasper Van der Vliet (Contact Author)

Eindhoven University of Technology ( email )

PO Box 513
Eindhoven, 5600 MB
Netherlands

Matthew Reindorp

Drexel University - Department of Decision Sciences ( email )

United States

Jan C. Fransoo

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

HOME PAGE: http://https://www.tilburguniversity.edu/staff/jan-fransoo

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