Forty of the world’s leading supply chain scholars were invited to the Olin Business School at Washington University in St. Louis, back before a virus’ early days gave rise to shortages of cleaners, toilet paper and such. This was May 2019, under the auspices of the 5thSupply Chain Finance and Risk Management Workshop in which The Boeing Center for Supply Chain Innovation served as host.
The assembled academics offered such relevant presentations, research and ideas — a full nine months before a pandemic derailed, if not stymied, global operations — that it produced a special edition in scholarship: how to pay for production and distribution today and manage global risks in a highly uncertain COVID-19 environment. Supply Chain Finance and Fin Tech Innovations was published Oct. 1 as the 14th volume of Foundations and Trends in Technology, Information and Operations Management.
The volume was co-edited by two Boeing Center/Olin faculty: Panos Kouvelis, the Emerson Distinguished Professor of Operations and Manufacturing Management and the center’s director, and Ling Dong, professor of operations and manufacturing management. Their third co-editor was former Olin colleague Danko Turcic of the University of California, Riverside.
“Innovative ways in managing working capital within global supply chains is of utmost importance in a turbulent environment,” said Kouvelis, who also sits on the journal’s editorial board. He also was part of a team that published a separate paper on these issues in the journal Production and Operations Management. “Especially small suppliers in global supply chains are currently stretched thin in their liquidity and ability to collect on their accounts receivables. Their debt exposure has drastically increased, and they rely on innovative financing schemes by their large corporate customers, such as reverse factoring schemes, or on fin tech innovations, such as the Ant Group fast loan services.”
Supply chain managers who want to stay in the forefront of such practices can benefit from the hot-off-the-press ideas in research shared in the workshop and appearing in the edited volume. “Our workshop benefits from the close interaction of the Boeing Center with its member companies, and we listen to the timely topics they want us to research. We bring state-of-the-art thinking back to them to advance their practices,” Kouvelis added.
The scholars came from the London Business School at the University of London, University of Chicago, Northwestern, Penn and Carnegie Mellon as well as top universities in Australia and China. They authored 10 different papers parsed into three supply chain themes: financing issues in supply chains, fin tech innovations for working capital and risk management, and advances in risk management of operational systems.
“Supply chain risk management is the other topic of timely importance in the current environment,” Dong said. “The last 20 years, and especially during the pandemic, made apparent to all that we are more frequently exposed to increased severity disruptive shocks. Building supply chain resilience is what all companies aspire in their initiatives right now.”
The question always remains: How to do it.
“There are some very interesting ideas and practical suggestions on better hedging operational and supply chain risks in the work summarized in the volume,” Kouvelis said.
In another recent work, Kouvelis and Turcic addressed both of the challenges prominently mentioned above: supporting working capital needs and better hedging certain risks (exchange rate exposure, commodity price fluctuations, interest rates and so on). The two researchers teamed on an automotive industry study forthcoming in Production and Operations Management.
They looked into the effectiveness of two data-driven financial hedging policies, cost hedging and cash hedging, aimed at mitigating financial distress, with their data coming from car manufacturing environments. The paper is titled “Supporting Operations with Financial Hedging: Cash Hedging Versus Cost Hedging in an Automotive Industry,” and for this study, they used data from the Federal Reserve Bank of St. Louis, U.S. Bureau of Labor, U.S departments of Treasury and Energy, and International Monetary Fund data.
The widely used cost-hedging strategy calls for carmakers to hedge raw material and production input purchases. That means they need to trade in raw materials to avoid higher costs, such as amassing the four essential commodities: aluminum, steel, zinc and plastic. Kouvelis and Turcic argue that a better way is to focus on cash hedging under which the firm hedges its net cash flow. Although managers are concerned about fluctuations in commodity prices, their study points out that demand changes are the most significant factor to be hedged.
Their findings also meant that cost hedging is barely more effective than no hedging at all and less effective — plus more costly — than a cash-hedging strategy, which hedges cost and demand. Moreover, in the current pandemic-affected environment, with changing consumer behavior and spending approaches across many product categories, including cars, and with volatile commodity prices, manufacturers should use cash-hedging policies to enhance operating cash flows and protect against financial distress.