The impact of credit risk on cash-bullwhip in supply chain

Abstract

Because cash flow is a critical issue for companies, it is important to effectively operate cash flow to mitigate liquidity risks. However, compared with research on the bullwhip effect, few studies have analyzed the effects and causes of the cash-flow bullwhip in the supply chain. None has considered the influence of credit risk on the cash-flow bullwhip effect from downstream to upstream throughout the supply chain. Thus, this study develops a mathematical model to investigate the influence of credit risk on the cash-flow bullwhip. To achieve this, it analyzes the variability of each member’s account receivable, account payable, and cash level along with three financial performance measures: account receivable turnover, account payable turnover, and cash conversion cycle. The excessive inventory level created by the bullwhip effect is known to cause the cash-bullwhip effect, which leads to supply chain members experiencing liquidity problems. However, the results of this study demonstrate that a consideration of credit risk increases the amounts of account receivable, account payable, and cash from downstream members to upstream members. In addition, this study demonstrates that when considering the credit risk, the account receivable turnover index accurately illustrates the cash-bullwhip effect of each member throughout the supply chain.