Predicting supply chain effectiveness through supply chain finance. Evidence from small and medium enterprises

Published date13 May 2019
Date13 May 2019
Pages488-505
DOIhttps://doi.org/10.1108/IJLM-05-2018-0118
AuthorZulqurnain Ali,Bi Gongbing,Aqsa Mehreen
Subject MatterManagement science & operations,Logistics
Predicting supply chain
effectiveness through supply
chain finance
Evidence from small and medium enterprises
Zulqurnain Ali and Bi Gongbing
School of Management, University of Science and Technology of China,
Hefei, China, and
Aqsa Mehreen
School of Public Affairs, University of Science and Technology of China,
Hefei, China
Abstract
Purpose Due to globalization,textile small and mediumenterprises (SMEs) operationshave become complex
which raisedthe needs of risk-freefinancing solutions to supportthe SMEsdaily process es. The purpose of this
paper is to investigatethe effect of supply chain (SC) finance,a risk-free financing solution,on SC effectiveness
(SCE) in the contextof textile SMEs by employing transaction cost (TC) approach.
Design/methodology/approach The participants of the study were recruited from textile SMEs through
a structured questionnaire. The proposed model and structural relationships were assessed by employing
AMOS 24.0.
Findings The results of this paper indicate that supply chain finance (SCF) has a significant effect on SCE.
Furthermore, all proposed factors of SCF adoption have a positive and significant effect on SCF.
Practical implications This study helps the SMEs executives or owners to adopt SCF as a secure
financing scheme to reduce the credit TCs, optimize the firm working capital, reduce the risk of default, and
improve SC effectiveness. SMEs and suppliers can build strong relationships while adopting the findings of
this study. SMEs can engage the suppliers to work under strategic alliance through negotiation, collaboration,
and work digitization, and extend their payment terms while providing an opportunity to the suppliers to get
their payment back before a fixed time through discounting from financial institutions as needed.
Originality/value The present study covered the gap related to SCF and SCE by identifying unique
factors of SCF adoption which was ignored in the previous literature by employing TC approach.
Keywords Survey, Small to medium-sized enterprises, Asia, Supply chain finance, Performance measurements
Paper type Research paper
1. Introduction
Supply chain (SC) management has become more complicated due to systematic changes in
the SC operations by the firms. Small and medium enterprises (SMEs) are searching for
different financing solutions which can help them to settle their credit issues and improve
financial performance. SC management emphasizes that organizations should have the
capacityto set up a long-run associationwith their partner organizations (Fei and Yi-na, 2006).
The recent economic decline brought a critical decrease in the sanctioning of new loans
(advances) with a substantial rise in capital cost (Ivashina and Scharfstein, 2010).
Furthermore, the lack of collateral-based financing makes the firms challenging to obtain
loans (Cornettet al., 2011). In such troublesomeconditions, SMEs (expresslythe firm with solid
negotiating ability) are extending business loans from suppliers to add-on different sorts
of loans to tackle upstream SCs issues (Garcia-Appendini and Montoriol-Garriga, 2013).
The International Journal of
Logistics Management
Vol. 30 No. 2, 2019
pp. 488-505
© Emerald PublishingLimited
0957-4093
DOI 10.1108/IJLM-05-2018-0118
Received 8 May 2018
Revised 4 August 2018
Accepted 19 October 2018
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/0957-4093.htm
Conflict of interest declaration: This research has no any conflict of interest.
This research was supported by the Natural Science Foundation of China (Nos 71731010 and
71571174).
488
IJLM
30,2
Such events profoundly contributed to the need for programs and solutions which can
support the working capital of a firm.
Ministry of Textile Industry (2015) stated that textile is the primary manufacturing
sector in Pakistan and is equipped with well-managed production lines which use more than
40 percent of the banking credit and bear the high cost of financing. Currently, there are
many supply chain finance (SCF) solutions in the market, offered by financial institutions
and financial service providers to SMEs. For example, inventory financing, working capital
optimization, fixed assets financing, reverse factoring, order cycle financing, and logistics
financing (More and Basu, 2013; Gomm, 2010). In Pakistan, the primary sources of supply
chain financing are the commercial banks which are actively providing SC loans to SMEs.
Mainly, most of the SMEs are obtaining SCF in terms of working capital optimization,
inventory financing, and fixed assets financing to fulfill their financing needs for the smooth
functioning of their operations. To minimize cost and risk, SCF has now become a core area
of the commercial banks business. Traditional credit financing schemes are backed by
collaterals which increase the firms risk (Zhao et al., 2015). SCF can bring the firms in a
position to deal with their suppliers by negotiating about terms for payment and make
long-term relations that lead toward strong collaboration among them. Currently, for SC
development, financial institutions are strengthening buyers and suppliersrelationships by
providing SCF to optimize their working capital. Firms are adopting the innovative
financing solutions (SCF) to avoid unacceptable risks and improving their SC performance
without losing their essential suppliers in the SC (Phillip, 2010). Therefore, in Pakistan, SCF
is providing an opportunity to SMEs for solving their credit issues by incorporating
long-term relations with financial institutions, making collaborations with the suppliers by
negotiating on raw material and services and improving the visibility of SC orders through
trade digitization process for all key players of the SC.
Previous literature identified two perspectives related to SCF. The first view focuses on
only financial activities and represents that SCF is all about monetary benefits (More and
Basu, 2013). The second view focuses on SC perspectives and represents that SCF
is not only a financial activity, but it also creates the relationship among SC players
(Gelsomino et al., 2016). Gelsomino et al. (2016) proposed a SCF framework for building
trust, commitment for timely delivery of goods, negotiation about terms of payment,
collaboration for information sharing about customer needs and supply-related matters.
It also provides visibility to buyers and suppliers about the digital process of transactions
and offers an opportunity to the suppliers to get their money back before a fixed time from
financial institutions (Caniato et al., 2016). Recent studies showed that SCF is considered
as a financial technique only to get cash for optimizing the firms working capital
(More and Basu, 2013) but ignored the long-run factors related to SCF which is essential
for the survival of th e firms. Therefore, m ore studies are needed to identify the relevant
factors which encourage the adoption of SCF in the textile sector. In the current study, we
proposed a model while focusing on transaction cost (TC) approach which states that SCF
works to mitigate the TC and offers a risk-free financial solution to SMEs for optimizing
their liquidity and improve their SC effectiveness (SCE). Thus, we focus on adoption
factors of SCF, which are equally critical to financial matters. The literature, however, did
not deliver any quantitative study that can encourage the firms to adopt SCF for fulfilling
their financing needs. Notably, it did not identify the crucial factors in the decision making
that can motivate the firms to adopt SCF. To fill this void gap, the present research
empirically examines different factors of SCF adoption (negotiation, collaboration, trade
digitization and role of financial institution) and their effect on SCE. The objective of this
paper is to explore different factors which constitute SCF and their contribution in the
advancement of more specific framework which facilitates managerial decisions making
concerning SCF and SCE.
489
Predicting
supply chain
effectiveness

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