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The impact of cost structure on supply chain cash flow risk

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  • Chih-Yang Tsai

Abstract

Managing supply chain cash flow risk has become a crucial task for many cash-stressed businesses. Cash flows usually lag behind operating earnings and exhibit higher volatility than earnings, making them less predictable. Through the three components of the cash conversion cycle – days in inventory, receivables, and payables, this study investigates the impact of cost structure – cost ratios and cost compositions – on cash flow risk (standard deviation) and explains why and how management philosophies, such as Just-In-Time, and new production technologies, such as 3D printing, can lower cash flow risk by shortening days in inventory and shifting cost structure. An analytical model built on a simple demand process examines the basic relationship between cost structure and cash flow risk while a simulation approach studies the same relationship under a more general demand process with additional modelling considerations and a benchmark test. The simulation approach is applied on a publicly traded company’s financial data to demonstrate how supply chain process improvement can reduce the cash flow risk.

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  • Chih-Yang Tsai, 2017. "The impact of cost structure on supply chain cash flow risk," International Journal of Production Research, Taylor & Francis Journals, vol. 55(22), pages 6624-6637, November.
    • Handle: RePEc:taf:tprsxx:v:55:y:2017:i:22:p:6624-6637
    DOI: 10.1080/00207543.2017.1330568
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    5. Özelkan, Ertunga C. & Lim, Churlzu & Adnan, Ziaul Haq, 2018. "Conditions of reverse bullwhip effect in pricing under joint decision of replenishment and pricing," International Journal of Production Economics, Elsevier, vol. 200(C), pages 207-223.

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