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Reducing the cost of capital by supply chain management

abstract The financial crisis and the connected recession force many companies to restructure their operations. New kinds of inter-organizational cooperation will evolve there from, such as cross-organizational funding of capital costs. Actually, in the moment many big manufactures have to finance their strategic network partners to save them from financial distress. In addition, for considerable time it is the opinion of academics that no longer sole companies are competing with each other, in fact the game in the present days is rather called "supply chain versus supply chain". This issue is amplified by the current crisis. The purpose of the research project suggested by the proposal at hand is to evaluate inter-organizational finance initiatives from a supply chain point of view. In the understanding of this proposal, supply chains are inter-organizational networks, in strong relation to processes and logistics, which are aligned with the needs of the final customer.
Research concerning optimal design and processes in supply chain management (SCM) has made great progress in the last decades. Nowadays companies are aware of the importance of SCM in almost all industries. Due to value-based management, decision makers are increasingly forced to assess the impact of supply chain initiatives on the financial strength and the value of their company. This requires profound insights on the link between operational excellence, collaboration in supply chains and financials respectively. Despite the interest of decision makers, instruments and methods which integrate financial aspects in SCM are not existent yet.
An issue which earned surprisingly sparse interest in the academic world is the reduction of capital costs through SCM. The cost of capital is composed of assets, the duration these assets have to be financed and the interest paid on the funds which are required to finance the assets. Prior research into this area was mainly concerned with the topic of decreasing work in progress and distribution inventory levels in the supply chain. Thereby, reducing the amount and the duration of fixed assets and hence capital, have already been broadly discussed in corresponding literature. Even so, the potentials of SCM to decrease funding costs by diminishing the mean interest rate paid on the assets, the weighted average costs of capital (WACC), has not been discussed yet, especially on a network-level.
The research project suggested in this proposal aims at investigating the possible reduction of the WACC in supply chains, in inter-organizational projects and for the players (firms) involved in such a network. Therefore, the determinants of the WACC in a supply chain and the contribution of the single players to the funding of the supply chain itself and the inter-organizational projects are important topics which have to be analyzed. Moreover, the question arises which is the appropriate activity for assigning a WACC, a supply chain or a supply chain project?
For answering these questions, a framework is proposed that on the one hand considers SCM and network settings, which can be seen as efficiency increasing in networks. On the other hand transaction costs and principal-agent theory, are taken into account as contingency factors as well as efficiency decreasing aspects. In the core of the framework stands a cash flow at risk approach.
   
keywords Weighted Average Cost of Capital, Supply Chain Management, Finance
   
partner
type fundamental research project
status completed
start of project 2009
end of project 2009
additional informations
topics Supply Chain Management, Finance
methods Structured literature review, conceptual analysis
contact Patrick Beck