Watch the working capital of tier-two suppliers: a financial perspective of supply chain collaboration in the automotive industry

Abstract

Purpose This paper aims to examine how lack of financial cooperation damages the operational efficiency of supply chains. The thesis is that economic and technological forces are provoking increasing financial tensions that push companies to transfer their credit needs and inventory requirements to their weakest suppliers. Thus, what might initially seem positive from an individual perspective can in fact generate losses in production efficiency for the supply chain as a whole. Design/Methodology/approach This paper uses official data collected from 116 first- and second-tier suppliers in the Spanish automotive components sector, covering nine years (2001-2009). The relationships between the key variables are analysed using panel data estimations. Findings Significant differences were found between the working capital (WC) of first- and second-tier companies, proving additionally that although this approach may temporarily improve the results of first-tier suppliers, it leads to lower production efficiency in plants throughout the value chain. Practical implications Practitioners should avoid short-sighted attitudes when organizing the supply chain on a cooperative basis, going beyond the conventional wisdom on physical and information flows between original equipment manufacturers and their suppliers to reach upstream stages and embracing financial considerations. Originality/value The paper takes a novel approach to the issue of inter-organizational collaboration in the supply chain, aiming to go beyond conventional Lean Supply practices. From an empirical point of view, while much of the research on the topic utilizes key informant insights collected using psychometric data collection techniques, this study uses different financial proxies collected from secondary panel data.