Prompt payment legislation can harm supply chain efficiency, say London Business School academics

Prompt payment legislation could be having a dampening effect on supply chain efficiency, according to research from The London Business School. 

In their article, Fix the Financing of Supply Chains, Nitish Jain and S Alex Yang examine France's ​LME law, which restricts trade credit to 60 days for most French firms.  

'We found that the LME had a significant impact on retailers’ inventory investment,' wrote Jain and Yang.  'Taking hardware retailers as an example, the LME caused a 16 percent decline in trade credit, which subsequently led to an 11 percent reduction in inventory. A drop in inventory is not only going to lead to emptier shelves and more unsatisfied customers, but also hurt retailers’ financial performance. Indeed, we observed a 15 percent drop in revenue and a 3 percent decline in gross profit for retailers due to trade credit restrictions.'

Jain and Yang argue instead for a market-based approach that incorporates supply chain finance platforms. 'The future of the financial supply chain should be empowered by technology, not confined by stricter regulation,' they conclude.

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