Working Capital Management across Supply Chains: A Review of Inventory, Receivables, and Supplier Payment Strategies

Abstract

Working capital management is usually treated as a firm-level finance problem, yet decisions about inventory, customer credit and supplier payment are made inside supply chains, where one firm's liquidity gain can become another firm's liquidity cost. This review examines how these three operating decisions affect liquidity and profitability, both within the firm and across trading partners, using the cash conversion cycle and its supply chain extension as an organising framework. Three conclusions emerge. First, shorter cash conversion cycles are generally associated with higher profitability, but the relationship is concave, so both excessive and insufficient working capital reduce performance. Second, the effect of each component depends on bargaining power, financing constraints and product characteristics, which explains why a policy such as extending supplier payment terms can raise returns for a large buyer while weakening its suppliers. Third, collaborative arrangements and supply chain finance instruments can lower the financing cost of the chain as a whole rather than merely shifting working capital between partners, although their net value is not yet well established. By separating genuine operational improvements from transfers of financing between partners, the review offers a chain-level view of working capital and identifies priorities for future research, including chain-level measurement, the link between operational risk and liquidity, and evidence from emerging economies.