A Dynamic Analysis of Supply Chain Risk Management and Extended Payment Terms

In this study, we employ system dynamics to study the combined effect of extended payment terms and a buyer's supply risk management practices on two outcomes: the supplier's bankruptcy risk and the buyer's financial bottom line. In conjunction with payment terms, we model the impact of two commonly recommended supply chain risk management (SCRM) practices: quick response to supply disruptions and use of a secondary (backup) source. Among other results, we uncover a feedback mechanism that contributes to the negative effect of extended payment terms on a supplier's finances and show that longer payment terms can worsen buyer outcomes, especially when the supplier faces a higher risk of disruptions. We also show that, when considered alongside extended payment terms, common SCRM practices may not always be beneficial for buyer firms. Our research suggests decisions related to SCRM and extended payment terms should not be made independently.