Factoring is a financial arrangement where the supplier sells accounts receivable to the factor against a premium and receives cash for immediate working capital needs. Reverse factoring takes advantage of the retailer’s payment guarantee and the credit rating differential between a small supplier and a large retailer, enabling the supplier to receive financing at a more favorable rate. We develop a supply chain theory of (recourse/non-recourse) factoring and reverse factoring showing when these post-shipment financing schemes should be adopted and who really benefits from the adoption. We find that recourse factoring is preferred when the supplier’s credit rating is relatively high, whereas non-recourse factoring is preferred within certain medium range of ratings. Both factoring schemes, if adopted, benefit both the supplier and the retailer, and thus the overall supply chain. Further, we find that reverse factoring may not always be preferred by suppliers compared to recourse and non-recourse factorings. Retailers should only offer reverse factoring to suppliers with low (but above a threshold) to medium credit ratings. The optimally designed reverse factoring program can always increase the retailer’s profit, but it may leave the supplier indifferent to the current factoring option when followed by an aggressive payment extension. More importantly, contrary to conventional wisdom, our theory implies that reverse factoring could be adopted even when the retailer has no credit rating advantage over the supplier, and it could benefit the retailer even without extending payment terms. This paper was accepted by Victor Martínez-de-Albéniz, operations management.

Problem definition: For many supply chains, deep-tier suppliers, due to their small size and lack of access to capital, are most vulnerable to disruptions. We study the use of advance payment (AP) as a financing instrument in a multitier supply chain to mitigate the supply disruption risk in a traditional system (with limited visibility) and a blockchain-enabled system (with perfect visibility). The main goal of this paper is to shed light on how blockchain adoption impacts agents’ operational and financial decisions as well as profit levels in a multitier supply chain. Academic/practical relevance: Traditionally, because of the limited visibility in the deep tiers, powerful downstream manufacturers’ financing schemes offered to their immediate upstream suppliers are not effective in instilling capital into the deep tiers. Advancements in blockchain technology improve the supply chain visibility and enable the manufacturer to better devise deep-tier financing to improve supply chain resilience. Methodology: We develop a three-tier supply chain model and take a game-theoretic approach to compare how blockchain-enabled deep-tier financing schemes affect a financially constrained supply chain’s optimal risk-mitigation and financial strategies. Results: We find that although improved visibility via blockchain adoption can help the manufacturer make informed supply chain financing decisions, whether it can benefit all supply chain members depends on the financing schemes in use. Blockchain-enabled delegate financing increases risk-mitigation investments and benefits all three tiers of the supply chain only when the tier 2 supplier is severely capital-constrained with the working capital below a threshold. Because delegate financing endows the intermediary tier 1 supplier with leverage over the manufacturer, the inefficiency inhibits an all-win outcome when the tier 2 supplier is not severely capital-constrained. Blockchain-enabled cross-tier direct financing exhibits a compelling performance as it always leads to win-win-win outcomes (and is thus ubiquitously implementable) regardless of the suppliers’ working capital profile. Managerial implications: Our insights help firms assess opportunities and challenges associated with enhancing supply chain visibility via blockchain adoption.

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