The impact of payment term extensions on the working capital management of an automotive supply chain

Abstract

Substantial evidence has shown that payment delays generate negative effects on suppliers’ working capital level and thus can further affect the entire supply chain’s working capital efficiency and even result in bankruptcy for capital-constrained suppliers. The adoption of emerging solutions such as supply chain finance (SCF) is considered an innovative approach to deal with this issue. However, the current literature seldom considers the impact of payment term extensions on the supply chain’s working capital management (WCM) through the development of applicable SCF methods. Thus, motivated by how SCF can improve a supply chain’s WCM in the presence of payment delay, we establish a multi-cycle model and identify the conditions under which extended payments will impact on the supply chain’s collaborative cash to cash (CC2C) cycle and the shareholder-value added (SVA). Finally, the numerical analysis not only confirms the major findings of this paper but also provides some additional insights that can assist practitioners in mitigating the adverse effects caused by payment delays.