The Supply Chain Cash-Flow Bullwhip Effect
Restricted (Penn State Only)
- Author:
- Patil, Chintan S
- Graduate Program:
- Industrial Engineering
- Degree:
- Doctor of Philosophy
- Document Type:
- Dissertation
- Date of Defense:
- February 23, 2022
- Committee Members:
- Suvrat Dhanorkar, Outside Unit & Field Member
Hui Yang, Major Field Member
Vittaldas Prabhu, Chair & Dissertation Advisor
Steven Landry, Program Head/Chair
Paul Griffin, Major Field Member - Keywords:
- Working Capital
Bullwhip Effect
Supply Chain - Abstract:
- We theorize that just like supply chains experience the bullwhip effect (BWE), they also experience the cash-flow bullwhip effect (CFB). CFB is the phenomenon of amplification of working capital variance in the upstream direction of the supply chains. High variance in working capital can cause financial distress to a firm and its trading partners in the supply chain and can reduce supply chain’s financial sustainability. A high CFB is indicative of a firm raising more capital than required to meet customer demand. Such situations increase operating costs and exacerbate the financial strain of firms with large weighted average cost of capital (WACC). A firm with large CFB and large WACC borrows more than the required amount of cash to support operations that too at a higher price. First, we propose an analytical model for cash-flow bullwhip to characterize working capital variance propagation in a serial supply chain. We use this model to study the relationship of procurement lead time, payment lead time, and demand autocorrelation with CFB in a serial supply chain. Second, we empirically investigate the existence of CFB and its association with company-level attributes by using a sample of 782 U.S. public companies during 2010−2019. We find that 31% of retailing, 25% of wholesaling, and 80% of manufacturing industries experience CFB. Furthermore, we find that a firm’s CFB is related to firm size, payment behavior, procurement and payment lead times, demand autocorrelation, demand seasonality, and liquidity. Insights from this empirical research can inform key efficiency and sustainability responses at firm, industry, and government levels. Firms can use this knowledge to reduce financial distress experienced by their supply chain and identify supply chain partners who could benefit from cash infusion. At industry level, this knowledge can be used to benchmark how fair and financially sustainable are the payment and inventory policies of the comprising firms. Finally, it can be used to inform trade and commerce policy and regulation formation at the government level. Third, we use simulation modeling to examine the effects of stochastic lead times and information sharing on CFB in serial supply chain. We also perform a comparative analysis of CFB and BWE between serial, convergent, divergent, con-div, and general supply chain topologies. Results reveal a significant difference between the CFB and BWE experienced by various topologies.