Collect payment early, late, or through a third party's reverse factoring in a supply chain

Abstract The payment mechanism plays an important role in coordinating a supply chain for better financial performance through cash flow optimization, which is key for today's business success. The supplier needs to decide on two issues regarding the payment mechanism: (a) the payment term, whether to collect payment early or late, and (b) the payment approach, to collect personally or through a third party. Focusing on these two issues, this study examines and compares the influence of three supply chain finance schemes: early payment, delayed payment, and reverse factoring on the financial performance of the supplier and retailer. We found delayed payment offers additional benefits to the supplier and retailer when the supplier has the financing advantage (i.e., a lower capital cost), and early payment and reverse factoring offer additional benefits to the supplier and retailer when the retailer has the financing advantage. With the bank's involvement and intermediation role, the increase in profits for the supplier and retailer, when using reverse factoring, is even higher than when early payment is used. The greater the difference in capital cost between the supplier and retailer, the greater the efficiency of the three financial schemes. Additionally, the financial schemes are more valuable with a higher production cost and higher demand volatility. Our study provides incentives and guidelines for the supplier and retailer to offer and use various financial programs to achieve better financial performance when faced with stochastic customer demand.