Blockchain-Enabled Deep-Tier Supply Chain Finance

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Author Information : Lingxiu Dong, Olin School of Business, Washington University in St. Louis
Yunzhe Qiu, Olin School of Business, Washington University in St. Louis
Fasheng Xu, Whitman School of Management, Syracuse University

Year of Publication : Manufacturing & Service Operations Management (2022)

Summary of Findings : For many supply chains, deep-tier suppliers, due to their small sizes and lack of access to capital, are most vulnerable to disruptions. We study the use of advance payment (AP) as a financing instrument in a multitier supply chain to mitigate the supply disruption risk in a traditional system (with limited visibility) and a blockchain-enabled system (with perfect visibility). The main goal of this paper is to shed light on how blockchain adoption impacts agents' operational and financial decisions as well as profit levels in a multitier supply chain.

Research Questions : We ask the following three main research questions in a multitier supply chain: (i) What are the optimal structures of supply chain finance (SCF) contracts and corresponding risk-mitigation measures without cross-tier visibility? (ii) How does the blockchain-enabled cross-tier visibility impact the SCF and risk-mitigation decisions? Can visibility benefit all supply chain members? (iii) Which type of blockchain-enabled deep-tier financing, delegate financing versus direct financing, can create a higher value for the supply chain?

What we know : Many deep-tier suppliers, due to their small sizes and lack of access to capital, are vulnerable to disruptions that impair their ability to fulfill supply chain orders. Downstream buyer-lead financing schemes such as advance payment (AP) intended to help the deep-tiers improve operational reliability are often ineffective because of the lack of visibility into the deep-tier's real needs for capital. Recent advancement in blockchain technology (e.g., zero-knowledge proof cryptography) has made secure, privacy-protection information sharing across the supply chain possible and propelled the development of blockchain-enabled supply chain financing based on deep-tier visibility. This paper studies how blockchain-enabled visibility affects the supply chain risk-mitigation effort.

Novel Findings : We find that although improved visibility via blockchain adoption can help the manufacturer make informed supply chain financing decisions, whether it can benefit all supply chain members depends on the financing schemes in use. Blockchain-enabled delegate financing increases risk-mitigation investments and benefits all three tiers of the supply chain only when the tier-2 supplier is severely capital-constrained with the working capital below a threshold. Because delegate financing endows the intermediary tier-1 supplier with a leverage over the manufacturer, the inefficiency inhibits an all-win outcome when the tier-2 supplier is not severely capital-constrained. Blockchain-enabled cross-tier direct financing exhibits a compelling performance as it always leads to win-win-win outcomes (and thus ubiquitously implementable) regardless of the suppliers' working capital profile. Our insights help firms assess opportunities and challenges associated with enhancing supply chain visibility via blockchain adoption.

Implications for Practice : Our results are consistent with extant stylized facts that it is typically the downstream manufacturers (e.g., the Samsung and Foxconn examples in the introduction section) who initiate the blockchain development for such deep-tier supply chain finance. Overall, the manufacturer, as our model suggests, is most likely to benefit from both delegate financing and cross-tier direct financing (in collaboration with third-party fintech firms). It provides the economic rationale for the manufacturer to develop and maintain the blockchain supply chain finance system in the presence of associated costs and efforts. Moreover, our model can also lead to new empirical implications. Our model predicts that cross-tier direct financing is a preferable option for the manufacturer due to its additional leverage of financing disintermediation, and thus would be more likely to be adopted in practice. We also predict that when the cost of blockchain implementation is not negligible, delegate financing would only be adopted in supply chains with severely capital-constrained tier-2 suppliers.

Implications on Research: Our research can be extended in several directions to address other open questions regarding deep-tier SCF. First, our work demonstrates research opportunities to integrate different SCF tools with the blockchain technology. Various SCF tools, such as factoring and reverse factoring, could be incorporated as possible future research venues. Second, this paper assumes that only tier-2 faces disruption risks. It will be interesting to explore how SCF tools help improve risk-mitigation investment when multiple tiers of suppliers face disruption risks. Finally, it will be interesting to explore other application potentials of blockchain technology in addition to our current focus on enabling cross-tier supply chain visibility. For example, blockchain adoption could help resolve the trust and commitment issues in various SCF activities.

Full Citations : Dong, L., Qiu, Y. and Xu, F., 2022. Blockchain-Enabled Deep-Tier Supply Chain Finance, Manufacturing & Service Operations Management (Forthcoming)

Abstract : Problem Definition: For many supply chains, deep-tier suppliers, due to their small sizes and lack of access to capital, are most vulnerable to disruptions. We study the use of advance payment (AP) as a financing instrument in a multitier supply chain to mitigate the supply disruption risk and compare the traditional system (with limited visibility) with the blockchain-enabled system (with perfect visibility). The main goal of this paper is to shed light on how blockchain adoption impacts agents’ operational and financial decisions as well as profit levels in a multitier supply chain. Academic/Practical Relevance: Traditionally, because of the limited visibility in the deep-tiers, powerful downstream manufacturers’ financing schemes offered to their immediate upstream suppliers are not effective in instilling capital into the deep-tiers. Advancements in blockchain technology improve the supply chain visibility and enable the manufacturer to better devise deep-tier financing to improve supply chain resilience. Methodology: We develop a three-tier supply chain model and take a game-theoretic approach to compare how blockchain-enabled deep-tier financing schemes affect a financially constrained supply chain’s optimal risk-mitigation and financial strategies. Results: We find that although improved visibility via blockchain adoption can help the manufacturer make informed supply chain financing decision, whether it can benefit all supply chain members depends on the financing schemes in use. Blockchain-enabled delegate financing increases risk-mitigation investments and benefits all three tiers of the supply chain only when tier-2 is severely capital-constrained with the working capital below a threshold. Because delegate financing endows the intermediary tier-1 supplier with a leverage over the manufacturer, the inefficiency inhibits an all-win outcome when the tier-2 is not severely capital-constrained. Blockchain-enabled cross-tier direct financing exhibits a compelling performance as it always leads to win-win-win outcomes (and thus ubiquitously implementable) regardless of the supplier’s working capital profile. Managerial Implications: Our insights help firms assess opportunities and challenges associated with enhancing supply chain visibility via blockchain adoption.

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