Working capital optimization under liquidity constraints in collaborative supply chains

Abstract

The paper is devoted to development of a working capital management model providing optimal levels of working capital to all individual business partners operating under the liquidity and return constraints through collaborative actions of capital reallocation along the supply chain. As such, we suggest the tool of working optimization through financial terms and cash flows verified on Russian collaborative supply chain data. Mathematical modeling is suggested as a method to upgrade existing collaborative cash conversion cycle model by optimizing it in terms of total financial costs minimization for a three-stage supply chain in the context of constrained liquidity and specified target return levels. The application of the suggested optimization model to focal supply chain provided significant acceleration of individual cash conversion cycles and investments in working capital by combining the extension of days of accounts payable, reduction in days of inventories and reduction in days of accounts receivable in different proportions for supply chain participants. The theoretical contribution consists of integrating collaboration and working capital concepts, adding a holistic perspective to extant working capital management models. The suggested model illustrates financially the motivation of supply chain partners to cooperate in order to simultaneously achieve target levels of WC investments and improve individual financial performance through collaborative operations.