Improving Service Levels through Reverse Factoring

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.