Managing Material and Financial Flows in Supply Chains

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2013

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Shang, Kevin H

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Abstract

This dissertation studies the integration of material and financial flows in supply chains, with the goal of examining the impact of cash flows on the individual firm's decision making and the overall supply chain efficiency. We develop analytical models to provide effective policy recommendations and derive managerial insights.

We first consider a credit-constrained firm that orders inventory to satisfy stochastic demand in a finite horizon. The firm provides trade credit to the customer and receives it from the supplier. A default penalty is incurred on the unfulfilled payment to the supplier. We utilize an accounting concept of working capital to obtain optimal and near-optimal inventory policies. The model enables us to suggest an acceptable purchasing price offered in the supplier's trade credit contract, and to demonstrate how liquidity provision can mitigate the bullwhip effect. We then study a joint inventory and cash management problem for a multi-divisional supply chain. We consider different levels of cash concentration: cash pooling and transfer pricing. We develop the optimal joint inventory replenishment and cash retention policy for the cash pooling model, and construct cost lower bounds for the transfer pricing model. The comparison between these two models shows the value of cash pooling, although a big portion of this benefit may be recovered through optimal transfer pricing schemes. Finally, we build a supply chain model to investigate the material flow variability without cash constraint. Our analytical results provide conditions under which the material bullwhip effect exists. These results can be extended to explain the similar effect when financial flows are involved. In sum, this dissertation demonstrates the importance of working capital and financial integration in supply chain management.

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Luo, Wei (2013). Managing Material and Financial Flows in Supply Chains. Dissertation, Duke University. Retrieved from https://hdl.handle.net/10161/8045.

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