Logistic Service Providers (LSPs) are increasingly required to take over the ownership of network-specific inventories to finance related working capital. The paper examines the nature of associated uncertainties, especially behavioral risks, and illustrates the mechanisms of the project financing approach to solve many of the specific challenges of an LSP to manage a network’s working capital. Based on an idealized automotive supply chain network, working capital-related conflicts of interest between members of a supply chain are discussed. Behavioral risks in a network are examined and context factors which moderate the intensity of those risks are identified. It is argued that the principles of project financing allow the design of working capital financing within the supply chain networks. The analysis of network risk structures concludes that behavioral risks associated with working capital makes it difficult to finance network-specific inventories by LSPs. Within network structures, the project financing approach is able to facilitate cooperative behavior between network members and enables the financing of network-specific working capital. The results can be applied to supply chain networks which are affected by opportunistic behavior merely in dynamic industries with structures similar to the automotive industry. The project financing technique, which originates from the field of large infrastructure investments, is adapted to the supply chain context. The contribution provides insights into the benefits and the mechanisms of this financing approach. Industries which often reconfigure their value chains should make use of this approach.

The management of complex supply chain networks like automotive networks blurs the traditional boundaries of corporations (Karlsson and Sköld, 2007; and Gassman et al., 2010). Figure 1 outlines the members of a supply chain network in the automotive industry and their relationships. It is common to focus on the entire automotive life cycle. Herein the services provided by Logistic Service Providers (LSPs) have become a focal role over the past years as they continuously extended their spectrum of logistics services (Andersson and Norrman, 2002, p. 4). The service bundles are often referred to as ‘contract logistics’ with long-term relationship between manufacturers and LSPs (Holweg and Miemczyk, 2002, p. 175; and MacNeill and Chanaron, 2005, p. 90). In such a network model, the LSP takes over the responsibility of the security of supply in the manufacturing process of the network.

The vital role of LSPs as provider of services in automotive supply chains has been the subject of many academic contributions in the last years. The current research is missing so far an analysis of the extended role of LSPs in automotive networks with regard to their financial impact on the supply chain network. The management of inventories and trade financing (e.g., factoring) are services that might be provided under the umbrella of contract logistics in the supply chain (Hofmann, 2009, p. 717). Recent research in the area of supply chain indeed pays increasingly more attention to the financial aspects and the potential of optimization (Timme and Williams-Timme, 2000; Hofmann, 2005 and 2009). Identifying the link between financial and physical flows helps to understand that disturbances in the flow of goods affect the financial layer and the financing requirements of network parties as well. Similarly, the way of raising funds is expected to affect the operational level of the supply chain network. For example, liquidity problems of a single supplier in the supply chain network can result in a disruption in the flow of goods and affect the entire network. Managing working capital can be considered as holding financial reserves and is also a general approach to handle risks, originated from fluctuations in market demand (Corbett, 2001, p. 487; and Chopra and Sodhi, 2004, p. 54). Thus, financial resources tied up in the net working capital are a kind of risk buffer, which compensates the volatility in physical flows and cash flows in the supply chain network.

Supply Chain Management Journal, Managing Behavioral Risks, Logistics-Based Networks, Project Finance Approach, Logistic Service Providers (LSPs), Management of complex supply chain networks.