Supply Chain Finance has received loads of attention ever since credit became scarce in late 2008. Interest in factoring, reverse factoring and purchase order financing has soared. A  supply chain manager of a major corporation recently summarized her company’s objective quite clearly: Reduce working capital. While this in itself might be a useful from some perspectives, true supply chain finance optimization should do much more than that. This is based on the premise that even in the finance literature there is increasing doubt on the empirical validity of the famous Modigliani-Miller theorem. Especially the existence of information asymmetry would argue for taking the operations characteristics into account when deciding on finance decisions. This explains to a large extent why banks are increasingly interested to better understand operations.

However, supply chain managers generally still disregard the potential operational benefits (and trade-offs for that matter) of supply chain finance. Let’s take the example of reverse factoring. Reverse factoring enables a (small) supplier to finance its working capital at the (lower) interest rates of its (large) customer. As a consequence, this buyer will decide – if optimizing its inventory decision – to increase its inventory. The buyer has a lower cost of capital, and hence inventory has become cheaper. This will increase the service level that the customer experiences. A clear operational benefit for the customer, which is usually the initiator of the reverse factoring arrangement – and driven by working capital reductions.

Supply chain managers need to better understand finance. This has been argued by many. I would however like to add something to this sentence: Supply chain managers need to better understand finance – to improve their operational performance. Any supply chain manager acting in this way will really add value to his company.