Simulation-based system dynamics optimization modelling of supply chain working capital management under lead time uncertainty

Working capital management (WCM) seeks to improve the efficiency of a firm’s operation through managing its inventory, accounts receivable, and accounts payable. Supply chain networks composed of various entities, e.g. supplier, manufacturer, which coordinate in order to deliver the finished product to the customer at the right time. The average days that it takes for a company to convert a dollar invested in raw material into a dollar collected from customer is defined as cash conversion cycle (CCC). A low CCC implies that the company has lower financial cost to fund its business operation. It goes without saying that, all firms are willing to decrease their financial cost through diminishing CCC, however minimization of the CCC for the supply chain echelons are in conflict, as one firm’s payable period is another firm’s receivable period. In this paper, a simulation- based optimization (SBO) model is developed to make trade-offs between conflicting cash conversion cycle minimizations for supply chain members through finding optimal values to the financial and inventory decisions parameters. The results indicated that CCC of the supply chain entities can be decreased significantly by employing optimal values of inventory and financial decisions parameters.