Sourcing from Suppliers with Financial Constraints and Performance Risk

Two innovative financing schemes have emerged in recent years to enable suppliers to obtain financing for production. The first, purchase order financing (POF), allows financial institutions to offer loans to suppliers by considering the value of purchase orders issued by reputable buyers. Under the second, which we call buyer direct financing (BDF), manufacturers issue both sourcing contracts and loans directly to suppliers. Both schemes are closely related to the supplier's performance risk (whether the supplier can deliver the order successfully), which the repayment of these loans hinges upon. To understand the relative efficiency of the two emerging schemes, we analyze a game-theoretical model that captures the interactions between three parties (a manufacturer, a financially constrained supplier who can exert unobservable effort to improve delivery reliability, and a bank). We find that when the manufacturer and the bank have symmetric information, POF and BDF yield the same payoffs for all parties irrespective of the manufacturer's control advantage under BDF. The manufacturer, however, has more fexibility under BDF in selecting contract terms. In addition, even when the manufacturer has superior information about the supplier's operational capability, the manufacturer can efficiently signal her private information via the sourcing contract if the supplier's asset level is not too low. As such, POF remains an attractive financing option. However, if the supplier is severely financially constrained, the manufacturer's information advantage makes BDF the preferred financing scheme when contracting with an efficient supplier. In particular, the relative benefit of BDF (over POF) is more pronounced when the supply market contains a larger proportion of inefficient suppliers, when differences in efficiency between suppliers are greater, or when the manufacturer's alternative sourcing option is more expensive

Oil and Gas Industry Leaders’ Strategies for the Development of Local Suppliers

Abstract: The preference for international oil and gas companies in most developing countries is to use global suppliers instead of local suppliers with inadequate capacity. Leaders in oil and gas companies who lack strategies for local supplier development contribute to the ecological and social problems in oil-rich, developing countries. Grounded in the sustainable supply chain management theory, the purpose of this multiple case study was to explore the strategies leaders in the oil and gas industry use for the sustainable development of local suppliers. The participants comprised five leaders in oil and gas companies in the Niger Delta region of Nigeria. Data were collected using semistructured interviews and a review of company documents. Yin’s five-step model guided the data analysis of the study, resulting in six emergent themes: creating business opportunities, leveraging the institutional framework, effective financial management, development of leadership and technical skills, collaborating with stakeholders, and effective performance management. A key recommendation is for leaders in the oil and gas industry to provide mentorship programs to build local suppliers\u27 financial, managerial, and technical capabilities. The implications for positive social change include the potential for leaders in the oil and gas industry to stimulate an entrepreneurial culture in their host countries and ensure the sustainability of the businesses of local suppliers to reduce unemployment

Supply Chain Finance Adoption:Three is a Crowd in Entangled Relationships

Supply Chain Finance (SCF) has gained increasing attention in recent years – for both favourable reasons, e.g. the critical need for working capital during economic recovery, and adverse reasons, e.g. high-profile scandals and abuses of SCF reported in the media such as Greensill and Carillion. The SCF literature has primarily focused on the economic advantages of SCF, and a so-called win-win-win approach claiming that all the parties involved , e.g. the bank, buyer, and supplier, would all benefit from SCF arrangements. Even though previous research on the adoption of SCF has pointed to the reluctance of firms, especially suppliers, to adopt SCF, the literature has given most attention to large focal firms, placing less emphasis on their supply chain partners. Yet supplier reluctance is also important to these focal firms as the successful implementation of SCF is determined by the degree of participation and frequency of transactions with suppliers. This has produced a need to systemically understand how small, less powerful non-focal firms construct their understandings of SCF and make decisions about SCF participation. This thesis investigates the understandings of, and the decision to adopt, SCF primarily in SMEs, both upstream as suppliers and downstream as distributors, in two different settings ─ the UK, where SCF is relatively well developed, and Thailand where SCF recently started in 2016. Given the dissensus in the literature regarding the appropriate theoretical underpinnings, this study employs a grounded theory-based methodology in which no theory was committed to before data collection and analysis, allowing for a substantive theory of SCF relationships to emerge from the collected data. This involved 56 interviews with SMEs, banks and subject experts as well as analysis of supporting documents. Consistent with grounded theory, the study sought to identify the main concern of the research participants and the way in which they dealt with this identified main concern. Through a constant comparative analysis of interview data, supporting documents, and relevant literature, the emergent main concern or core category was identified as the ‘Dyadic - Triadic distinction’. This distinction was between dyadic forms of SCF, in which informants had relatively independent relationships in their physical and financial supply chains, and triadic forms, in which relationships were entangled in some way. Triadic forms appeared to be inherently problematic, leading to the thesis that ‘Three is a Crowd’. Participants dealt with this main concern through five interrelated categories of concern ─ Risk, Relationship, Awareness, Control, and Context. Following the emergence of the main concern or core category and the five interrelated categories, a systematic analysis was undertaken of how transaction cost economics (TCE), which was identified as the most appropriate formal theory, could and could not account for the findings. For example, many of the findings could be interpreted in terms of opportunism and information impactedness, but there were concerns with relationships and control that could not be explained by TCE. From this analysis a qualitative model of how SMEs understood and made decisions to adopt SCF was proposed. In addition, a more detailed model was developed to show the significance of signalling concerns in the findings. The main contribution of this thesis is to show how the firms often meant to be the primary beneficiaries of SCF – SMEs – are much less concerned with technical advantages (such as lower financing cost), and much more concerned with the relational consequences of participating in more complex triadic forms of SCF. The key practical implication that is drawn is that focal firms need to be aware, when offering triadic SCF to their smaller supply chain partners, that these partners often have existing dyadic SCF relationships. Therefore, their decision to adopt an offered triadic SCF is not straightforward, but involves participating in a new relationship and at the same time having to maintain or reduce existing ones ─ often including both financing and supply chain relationships