Why supplier instability weakens supply chain financing

A new study published in the International Journal of Production Economics reveals that supplier instability significantly hinders the effectiveness of supply chain financing (SCF) by disrupting relational governance. Analyzing data from Chinese manufacturing firms between 2015 and 2023, researchers found that operational disruptions from unstable supplier relationships directly weaken the conditions necessary for financing collaboration. These findings suggest that SCF success depends less on capital availability and more on a buyer's ability to coordinate relationships amid environmental complexity.

Research led by Professor Lujie Chen of the International Business School Suzhou at Xi’an Jiaotong-Liverpool University (XJTLU) challenges the traditional view that supply chain financing is primarily driven by liquidity or formal arrangements. By examining panel data from Chinese listed manufacturing firms spanning 2015 to 2023, the study identifies a significant negative association between supplier instability and the smooth operation of SCF mechanisms. The research highlights that even when financing structures are available, unstable relationships create a barrier that prevents capital from flowing through the supply chain, transforming a financial design problem into a relational governance challenge.

The study explores how power dynamics and financial slack influence a firm's ability to mitigate the negative effects of supplier instability. Both possessed power and realized power serve as buffers, allowing firms with stronger control over their suppliers to maintain financing collaboration despite instability. However, the role of financial slack is more complex; while it strengthens the buffering effect of realized power, it actually weakens the effect of possessed power. This suggests that excess financial resources do not inherently improve governance unless they are actively used to translate influence into concrete actions.

Professor Chen emphasizes that managers must treat supplier instability as a direct barrier to SCF rather than just an operational risk. The research advises firms to distinguish between having structural power and actually exercising it to manage supplier relationships effectively. Furthermore, the study suggests that financial slack must be managed carefully to support proactive governance rather than serving as a passive substitute for it. Ultimately, the success of supply chain financing in volatile environments relies on the strategic configuration of resources and the effective use of influence to stabilize the supply base.