Speaker: ManMohan Sodhi, Bayes Business School

Title: Why “win-win” reverse factoring fails to attract many suppliers in supply-chain financing

Abstract: Reverse factoring — called supply-chain or buyer-led finance — has been presented as a “win-win” for buyers, suppliers, and financiers. However, many suppliers prefer to stay with trade credit even with a higher cost of capital than the buyers. We compare trade credit and reverse factoring analytically to identify the conditions under which one fares better than the other, including those pertaining to the misperception of the credit rating of the buyer and the supplier. We determine how the choice of financing affects the total supply chain surplus and how the surplus is split up in a generic transaction and horizontal competition among suppliers. Our results are as follows: (1) Under a generic transaction, the standard narrative holds in that reverse factoring is ‘efficient’ while trade credit is not. Moreover, the supplier is protected against the buyer’s default in reverse factoring: even if the buyer’s creditworthiness is overrated, enabling the buyer to raise his profit margin, under trade credit, the supplier would have to absorb this increase while under reverse factoring, it would be the financier, not the supplier. However, a supplier with an underrated credit rating would prefer trade credit over reverse factoring. (2) Under horizontal competition between two suppliers, the standard narrative does not hold. Depending on the differential interests of the two financing schemes, at least one supplier or both would opt for trade credit over reverse factoring. Thus, reverse factoring cannot be attractive to all suppliers under horizontal competition.

Keywords: Reverse factoring, supply chain finance, horizontal competition, creditworthiness, information asymmetry. 

Bio: Professor ManMohan S. Sodhi is in the operations and supply chain management area at Bayes Business School (formerly Cass) at City, University of London. He received his B.Tech. in Mechanical Engineering from IIT Delhi and Ph.D. in management science from the UCLA Anderson School of Management at the University of California, Los Angeles. Subsequently, he taught at the University of Michigan, where the Sloan Foundation funded his research in the trucking industry. His research interests lie primarily in supply chain management, particularly digitalization, risk, and sustainability. Before joining Bayes in 2002, he worked in management consulting with clients in various industries, including consumer electronics, commodity and specialty chemicals, petroleum products distribution, hospitality industry procurement, and airlines. He has published four books and nearly a hundred articles in academic and managerial journals, including the Journal of Operations Management, MSOM, Operations Research, Production and Operations Management, Harvard Business Review, and Sloan Management Review. Citations of his publications have earned him a place among top researchers in the Stanford/Elsevier rankings, SSRN, and Research.com. 

Coordinators: Marcel Turkensteen and Sanne Wøhlk