Supply chain cash-flow bullwhip effect: An analytical model for working capital variance propagation

Abstract

This research article probes the cash-flow bullwhip effect (CFB), a phenomenon precipitating an increase in the fluctuations of working capital within supply chains. A novel analytical model is proposed to delve into the CFB within a multi-echelon, serial supply chain, taking factors into account, such as demand autocorrelation, procurement lead time, and payment lead times. Our study implies that extended procurement lead times contribute to a heightened CFB, and a substantial discrepancy between a firm’s payment lead time and that of its customers results in a more pronounced CFB. Importantly, adopting shorter payment lead times for customers and extending them for suppliers can inflate the cash-flow bullwhip for all three constituent entities: the echelon, its customers, and suppliers. Our quantitative analysis reveals that strategies, such as payment batching and divulging end-customer demand information can mitigate the cash-flow bullwhip by as much as 49.5 and 53.7%, respectively. Empirical inspection of the CFB experienced by a sample of 786 companies from 2010 to 2019 demonstrates that ∼65% of these companies intensify their working capital variance. This underscores the need for cautious management of working capital variance and the adoption of suitable inventory and payment strategies to forestall financial turmoil within the supply chain.