Working capital optimization in a supply chain perspective

Abstract

Effective working capital management encourages rapid turnover of inventory and capital from a single firm perspective. This strategy could cause financial pressure on a firm's suppliers or distributors, hurt the supply chain, and even have an adverse effect on the firm itself. We attempt to find out the optimal deploying of working capital in a supply chain perspective. A supply chain with one supplier and one retailer who faces uncertain demand is considered. The payment period of the retailer is determined to maximize the profits, besides the wholesale price and the order quantity. We build three models to capture different cooperation levels of the supply chain: non-cooperative, negotiatory and centralized. The equilibrium solutions show that the payment period should be maximized when the retailer's discount rate is higher than the supplier's and vice versa, regardless of the cooperation levels. In consideration of different claims of profit sharing, we propose the supply chain-oriented solution of working capital management.