Abstract

     Because cash flow is a critical issue for companies, it is important to effectively operate cash flow to mitigate liquidity risks. However, compared with research on the bullwhip effect, few studies have analyzed the effects and causes of the cash-flow bullwhip in the supply chain. None has considered the influence of credit risk on the cash-flow bullwhip effect from downstream to upstream throughout the supply chain. Thus, this study develops a mathematical model to investigate the influence of credit risk on the cash-flow bullwhip. To achieve this, it analyzes the variability of each member’s account receivable, account payable, and cash level along with three financial performance measures: account receivable turnover, account payable turnover, and cash conversion cycle. The excessive inventory level created by the bullwhip effect is known to cause the cash-bullwhip effect, which leads to supply chain members experiencing liquidity problems. However, the results of this study demonstrate that a consideration of credit risk increases the amounts of account receivable, account payable, and cash from downstream members to upstream members. In addition, this study demonstrates that when considering the credit risk, the account receivable turnover index accurately illustrates the cash-bullwhip effect of each member throughout the supply chain.

Introduction

     Supply chain management controls material, information, and cash flows to efficiently convert raw materials from upstream into products to downstream through the supply chain. Because supply chain management is considered essential for companies wishing to achieve a sustainable business operation, the management of material, information, and cash is deemed important in the contemporary business environment. To improve the efficiency of the supply chain, most companies have strived to identify and solve the problems occurring from the flows of material, information, and cash through the entire supply chain. However, compared with the efforts companies expend on the management of material and information flows, there has been little focus on the cash flow of the supply chain as a means of improving efficiency.

     One of the critical problems in the supply chain is a bullwhip effect, which refers to an increasing inventory fluctuation moving from downstream members to upstream members in response to distorted information on customer demand. Distorted demand results in an inefficient production and excess inventory which exacerbates the liquidity problems of supply chain members. In other words, the bullwhip effect further leads to a cash-bullwhip effect, which is defined as an increase in the variance of a cash conversion cycle from downstream to upstream through the supply chain that corresponds to inventory fluctuation (Tangsucheeva & Prabhu, 2013). Like the bullwhip effect, the cash-bullwhip effect is important for companies wishing to achieve sustainable business operations through the efficient and effective management of production and inventory. To mitigate the effects of the cash-bullwhip effect, a prerequisite is to identify its causes and impacts on all members of the supply chain.

Conclusion

     Although the bullwhip effect and the credit risk are critical issues in material flow and cash flow throughout the supply chain, no studies have considered these two important issues simultaneously. For these reasons, this study investigated the impact of credit risk on the cash-flow bullwhip effect from downstream members to upstream members along the supply chain in terms of account receivable, account payable, and cash. To analyze the cash-bullwhip effect, three financial performance indicators were used— account receivable turnover, account payable turnover, and cash conversion cycle.

     Having applied the developed cash-bullwhip effect mathematical model, the results demonstrate that credit risk consideration improves the liquidity problems of each supply chain member by increasing the amounts of account receivable, account payable, and cash from downstream to upstream. The results also indicate that the account receivable turnover accurately indicates the cash-bullwhip effect of each member. However, the account payable turnover and the cash conversion cycle do not accurately illustrate the cash-bullwhip effect phenomenon in the case of credit risk consideration.