Why supplier instability weakens supply chain financing

As supplier relationships become increasingly unstable, many firms assume that supply chain financing depends mainly on liquidity conditions or formal financing arrangements. However, this view is incomplete. Research published in the International Journal of Production Economics by Professor Lujie Chen of International Business School Suzhou (IBSS) at Xi’an Jiaotong-Liverpool University (XJTLU) and her collaborators shows that whether supply chain financing runs smoothly also depends on buyers' ability to coordinate relationships and processes effectively amid the environmental complexity created by supplier instability.

Based on panel data from Chinese listed manufacturing firms from 2015 to 2023, the study finds that supplier instability has a significant negative association with supply chain financing. Unstable supplier relationships not only cause operational disruption but also directly weaken the conditions required for financing collaboration — even when financing mechanisms themselves are available.

What factors can mitigate this negative effect? The research reveals the complex role of power and financial slack. Both possessed power and realised power buffer the impact of supplier instability — firms with stronger influence over suppliers are better able to maintain financing collaboration. However, the role of financial slack is more nuanced: it weakens the buffering effect of possessed power but strengthens the buffering effect of realised power. In other words, excess financial resources do not automatically improve governance effectiveness; their value depends on whether firms can translate influence into action.

Professor Lujie Chen notes: "Supply chain financing is not a purely financial design; it is a relational governance challenge. The money may be there, but unstable supplier relationships can stop it from flowing. Power is useful, but it only works when converted into action. Slack is not always better; how it is configured matters."

For managers, there are three implications. First, treat supplier instability as a direct barrier to supply chain financing, not merely an operational risk. Second, distinguish between possessed power and realised power — structural influence must be translated into concrete governance actions. Third, manage financial slack carefully so that it supports proactive supplier governance rather than replacing it. The success of supply chain financing depends not only on whether  whether capital is sufficient, but also on whether firms can use their influence and financial resources effectively to manage unstable supplier relationships.

About the author

Lujie Chen is a full Professor of Management at Xi’an Jiaotong-Liverpool University. Prof Chen was included in the Elsevier-Stanford University World's Top 2% Scientists 2024 and 2025. She is a Fellow of the Higher Education Academy in the UK and an expert in the fields of supply chain management and business analytics. Professor Chen have published over 60 high-quality and impactful papers in top-tier journals such as the Journal of Operations Management (UTD 24), Harvard Business Review (FT50), International Journal of Operations and Production Management (ABS 4), British Journal of Management (ABS 4), and European Journal of Operational Research (ABS 4), among others. She has served as a guest editor for special issues of several respected journals such as International Journal of Operations and Production Management, Industrial Marketing Management, International Journal of Production Economics, and Journal of Business Research. She is currently serving as an Associate Editor for the International Journal of Operations and Production Management (ABS 4) and department editor for IEEE TEM (ABS 3) and editorial board for Humanities and Social Sciences Communications (Nature Portfolio, CAS Humanities Q1 & JCR Q1).

Journal

The International Journal of Production Economics focuses on the intersection of engineering and management, covering manufacturing, process industries, and the full cycle of production activities. It aims to disseminate knowledge to improve industrial practice and strengthen the theoretical foundation for sound decision-making, providing a platform for exchange at the crossroads of engineering technology and the managerial and economic environment. The journal combines academic rigor with practical value for industrial applications.

Click here for full paper

By Xiaoxuan Chen

Edited by Thomas Durham