JOURNAL OF BUSINESS LOGISTICS, Vol. 31, No. 2, 2010 305 A SUPPLY CHAIN-ORIENTED APPROACH OF WORKING CAPITAL MANAGEMENT by Erik Hofmann University of St. Gallen, Switzerland and Herbert Kotzab Copenhagen Business School, Denmark INTRODUCTION Starting Point of Considerations It is taken for granted that supply chain management (SCM) has a significant impact on a company’s financial performance (Ellram and Liu 2002; Hofmann and Locker 2009). Evidence about the direct link between supply chain performance and stock-exchange price is shown by Singhal and Hendricks’ (2002) study. D’Avanzo, Von Lewinski, and Van Wassenhove (2003) identify a correlation between successful SCM and financial performance where they show that the growth rates of market capitalization are 7 to 26 % higher in companies with excellent SCM (“supply chain leaders”) than the average. As SCM refers to inter-organizational arrangements, we can identify a certain dilemma between the members of a supply chain when all actors want to achieve the same goal of financial improvement. Credit risk and capital costs are often transferred to other stages in a supply chain when practices such as payables extensions to suppliers, enforcement of receivables collection to customers, or unbalanced inventory programs are applied (Pohlen and Goldsby 2003). Extended payment terms that pose a lower risk to buyers include a higher risk for suppliers, who may often have restricted access to short-term financing and a higher cost of capital. Simply shifting costs to suppliers may result in short-term balance sheet benefits. It can boomerang back, however, in the form of a less financially stable, and thus a higher-risk supplier base. Suppliers may be forced to delay raw material ordering, squeeze work-in-process inventories, or skimp on service levels or quality processes, when they are strapped for cash and lack adequate access to affordable capital. This triggers downstream delays and quality issues for the buyer, including manufacturing breakdowns, or late orders for key accounts. In addition, suppliers are eventually forced to include the cost of extended payment terms in the cost of goods sold. Over the long-term, cost-shifting to suppliers will result in an overall higher cost of goods sold versus competitors who have established more collaborative practices in their supply chains. Nonetheless, we propose; in accordance with Timme and Williams-Timme (2000); that financial figures such as working capital or shareholder value-added are common indicators for measuring the performance of a supply chain. The working capital measures (i.e., the cash conversion cycle or cash-to-cash cycle) are composite performance metrics for assessing how well a company is managing its capital (Farris and Hutchinson 2002). These key numbers express operational performance in financial terms and can be derived from published financial statements (Lambert and Pohlen 2001). The working capital metrics not only highlight the drivers of a single company’s working capital, but also the dynamics of a business. Moreover, working capital metrics are important