Integrating sourcing and financing strategies in multi-tier supply chain management

Abstract

This study investigates the financial leveraging effect of a final assembler's sourcing strategies in a multi-tier supply chain—a three-tier supply chain consisting of a large final assembler (FA), a first-tier supplier (S1), and a second-tier supplier (S2). From the perspective of FA, we consider two sourcing and four financing strategies. The two sourcing strategies entail delegating component procurement to S1 (sequential sourcing) or directly procuring from S2 (directed sourcing). The four financing strategies include commercial loan financing, factoring, and reverse factoring with or without a payment term extension. Our main objective is to find out the combination of the sourcing and financing strategies and the relative conditions that would induce better operational decisions and enhance overall supply chain performance. The results reveal the contingencies when directed sourcing or sequential sourcing might work well. For instance, when the suppliers utilize factoring as a financing option, FA, S2, and the supply chain are better off with directed sourcing when S2 is powerful or when S2's impact is low but the interest rate is high. Otherwise, sequential sourcing guarantees the better profit for FA, S2, and the supply chain. Reverse factoring yields more predictable performance, which can be utilized either for the FA's benefit with a payment term extension or for the supply chain's long-term health without a payment term extension.