Cleaner Logistics and Supply Chain 8 (2023) 100115

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Cleaner Logistics and Supply Chain

journal homepage: www.journals.elsevier.com/cleaner-logistics-and-supply-chain

An intelligent method for supply chain finance selection using supplier

segmentation: A payment risk portfolio approach
Kedar Shiralkar a, Arunkumar Bongale a, *, Satish Kumar a, c, Anupkumar M. Bongale b
a
Symbiosis Institute of Technology, Symbiosis International (Deemed University), Lavale, Pune 412115, Maharashtra, India
b
Department of Artificial Intelligence and Machine Learning, Symbiosis Institute of Technology, Symbiosis International (Deemed University), Lavale, Pune 412115,
Maharashtra, India
c
Symbiosis Centre for Applied Artificial Intelligence, Symbiosis International (Deemed University), Lavale, Pune 412115, Maharashtra, India

A R T I C L E I N F O A B S T R A C T

Keywords: The COVID-19 pandemic-driven financial crisis grew significant interest among firms to adopt supply chain
Supply chain finance (SCF) finance (SCF) to optimize working capital for the financial stability of the supply chain. However, it is impractical
Supplier segmentation for firms with a diverse and extensive supplier base to strategize the SCF solutions for individual suppliers by
Supplier categorization
assessing their financial risk. Hence, this study conceptualizes an intelligent method to demonstrate how supplier
Risk portfolio model
Supply chain sustainability
segmentation based on suppliers’ payment risk portfolios helps supply chain practitioners to assess suppliers’
Supplier relationship management financial risk and strategize manageable supply chain finance solutions for them. This method employs a sto­
Modern portfolio theory chastic optimization model to compute suppliers’ optimum payment risk portfolios and generate a supplier
Trade credit segmentation matrix to offer supply chain practitioners the cognitive ability to select appropriate SCF solutions
Factoring for their suppliers. The proposed method can be implemented into an AI-driven explainable recommendation
Dynamic discounting system to aid supply chain practitioners in applying smart strategic thinking in supply chain finance decision-
making.

1. Introduction
In recent times, supply chain finance (SCF) solutions have gained
significant attention to mitigate economic turmoil in the global supply
chain caused by financial distress during disruptions (Hakovirta and
Denuwara, 2020). SCF solutions equip the supply chain businesses with
the working capital necessary to keep the operations running and thus
bring financial efficiencies in the supply chain (Pfohl and Gomm, 2009).
Perhaps SCF solutions exploit deep knowledge of supply chain relations
and dynamics to optimize financial performance and control working
capital, thus improving firms’ competitiveness (Chen et al., 2019).
Hence, many firms use supply chain finance as a risk mitigation tool that
provides faster payment options to make their supply chain a true value
chain. Firms prominently use SCF solutions such as Trade Credit and
Factoring to offer financial access to the supply chain members to
strengthen them during crises (Xu et al., 2018).
The COVID-19 pandemic caused severe adverse economic implica­
tions to firms and their supply chain partners, leading to significant
distress in managing financial liquidity in the supply chain to facilitate
demand and supply challenges. The dramatic fall in demand for goods
and services caused serious cash liquidity issues for supply chain part­
ners, pushing them for job cuts and postponing capital investments to
reduce expenditures. These problems led to a significant downgrading of
business revenue for firms. Thus, the COVID-19 pandemic-related sup­
ply chain financial disruption emphasized the need for the evolution of
supply chain finance that holistically considers the financing of all the
transactions done in the end-to-end supply chain. The new supply chain
finance strategies need to focus on long-term funding of the resources in
the supply chain to improve their financial capacities to operate effi­
ciently even during disruptions. Therefore, the new SCF solutions should
offer suppliers comprehensive financing options to maintain adequate
working capital to make the supply chain resilient to future financial
crises (Hofmann et al., 2021).
The fundamental principle of supply chain finance is to extend a
firm’s financial strengths to its weak supply chain partners to improve
working capital in the supply chain (Wuttke et al., 2019). Therefore to
find weak suppliers, it is essential to determine the individual supplier’s
risk portfolio that reflects its overall risk by assessing its payment per­
formance pattern over time. Moreover, firms with a diversified supplier
base have challenges in formulating the supply chain finance strategy

* Corresponding author.
E-mail addresses: arunbongale1980@gmail.com (A. Bongale), ambongale@gmail.com (A.M. Bongale).

https://doi.org/10.1016/j.clscn.2023.100115
Received 2 December 2022; Received in revised form 15 May 2023; Accepted 27 June 2023
Available online 14 July 2023
2772-3909/© 2023 The Author(s). Published by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-
nc-nd/4.0/).
K. Shiralkar et al.
for an individual supplier by determining its payment risk portfolio.
Hence, firms need to categorize their suppliers into manageable cate­
gories by evaluating their payment risk portfolios. This process is called
supplier segmentation. The firms then can develop the appropriate
supply chain finance strategy for each group of suppliers to make the
supply chain financially stable and efficient (Ali et al., 2018). In fact, one
exploratory research study on supply chain finance emphasized that that
supplier segmentation assists firms in planning appropriate supply chain
finance strategies for their suppliers to minimize supply chain risks
associated with their suppliers (de Goeij and Steeman, 2016). Over
recent years, a variety of supply chain finance solutions are available for
firms to mitigate the financial risks associated with supply chain dis­
ruptions. However, the existing methods of selecting appropriate supply
chain finance solutions are not adequate to gain optimum benefits. This
is due to the lack of a method of assessing the supplier risk portfolio
based on suppliers’ payment behavior. Also, with a large supplier base,
firms struggle to choose appropriate supply chain finance solutions for
different suppliers. Therefore, this study aims to conceptualize such a
method that aids firms in improving their supply chain finance decision-
making even with a large supplier base. Also, the suppliers’ behavior is
inconsistent depending on their ability to face market crisis situations.
Therefore, the proposed method should be able to assess the variability
in the suppliers’ behavior more accurately. Hence, to make this method
reliable, we propose to implement stochastic optimization techniques
for suppliers’ portfolio computation.
2. Literature review
In the literature review, we analyzed the literature on the role of
supply chain finance for supply chain risk improvement and the factors
affecting supply chain finance decision-making. We also studied the
literature on the methods to assess suppliers’ risk portfolios. This is
because suppliers’ risk portfolio represents suppliers’ attitude which is
crucial for firms to financially deal with the suppliers during the supply
chain crisis.
2.1. Role of SCF in supply chain risk mitigation
The complexity of modern supply chains makes the supply chain
finance increasingly popular because it can provide untapped promising
sources of financing within inter-organizational settings to mitigate cash
liquidity issues effectively. Thus, it reduces the supply chain’s financial
risk resulting in improved firm performance and supply chain effec­
tiveness (Hofmann and Johnson, 2016; Ali et al., 2020). With acceler­
ated funding using SCF solutions, firms can boost production volume to
meet market demands and take off the trade debt from the balance sheet,
reflecting their financial position more robust in the balance sheet
(Dyckman, 2009).
The digitalization of SCF solutions brings transparency in financial
transactions in the supply chain, thus improving trust and commitment
among supply chain partners leading to profitability throughout the
supply chain (Banerjee et al., 2021; Gelsomino et al., 2016).
2.2. Indicators determining Suppliers’ risk attitude
Firms increasingly adopt SCF solutions to offer financing alternatives
to their suppliers but struggle to get expected benefits (Martin and
Hofmann, 2019). Therefore, some guidance is needed for a firm to
choose an appropriate supply chain finance strategy for their suppliers.
Some research studies emphasized that determining the risk aversion
attitude of the supplier guides supply chain experts to plan SCF solutions
for their suppliers (Yang et al., 2021; Yang et al., 2021; Chen et al.,
2019). The assessment of the supplier’s risk based on the payment
behavior can effectively determine the supplier’s risk-aversion attitude
(Chiu et al., 2011).
The “% Paid invoices” represents account receivable volume. Higher
2
Cleaner Logistics and Supply Chain 8 (2023) 100115
the % Paid invoices means low outstanding account receivables and thus
could be a good indicator of how suppliers manage their business
effectively and secure adequate working capital (Basu and Nair, 2012).
The “Average payment days” indicator signifies the account re­
ceivable period. Offering the extended term for the payment to a capital-
constrained supplier provides cash liquidity to ease operational expense-
related challenges to steer the supply chain operations efficiently.
Moreover, offering trade credit with extended payment terms allows a
firm to obtain profit maximization benefits through higher interest
earned on credit due to an extended payment period. Thus, it creates a
win–win situation for both firm and suppliers (Yang et al., 2021; Jing
and Seidmann, 2014).
Therefore, building a supplier’s payment risk portfolio based on
these two indicators could be helpful to determine the supplier risk
aversion attitude to aid in supply chain finance decision-making.
2.3. Selection of SCF solutions based on Supplier’s risk attitudes
Over recent years, a variety of SCF solutions have been made avail­
able to firms to mitigate the impact of supply chain disruption on their
cash flow. Table 1 illustrates the choice of SCF solutions based on sup­
pliers’ risk attitudes to improve supply chain performance and
profitability.
2.4. Methods to build Suppliers’ risk portfolio
In supply chain management, the classical newsvendor problem-
solving approach is employed to design the supplier risk portfolios.
However, these approaches do not consider the risk-averse attitude of
the supplier and focus on the objective of either maximizing the ex­
pected profit or minimizing the expected cost (Biswas et al., 2020).
Recent Researches have widely adopted dynamic portfolio optimi­
zation models for supplier risk portfolio. Hosseininasab and Ahmadi
proposed a multi-objective portfolio optimization model that de­
termines the supplier risk portfolio by maximizing the expected value
and minimizing their correlated risk (Hosseininasab and Ahmadi, 2015).
Torres-Ruiz and Ravindran developed a Multi-criteria Supplier Sus­
tainability Risk Assessment Framework (SSRAF) that assesses sustain­
ability risk based on economic, environmental, and social risk factors
(Torres-Ruiz and Ravindran, 2018). Mokhtar et al. use a combined
simulation–optimization framework for optimal selection of supplier
portfolio and use indicators such as supplier’s profitability, production
quality, and suppliers’ cost (Mokhtar et al., 2019). The main drawback
of this method is that it is more compute-intensive, and the practitioner
has to determine the objective function precisely; otherwise, it could
lead to an incorrect outcome. One study used the integrated Best-Worst
method (BWM) and K-means clustering approach to obtain different
groups of alternative suppliers with similar supply risk levels (Er Kara
and Oktay Firat, 2018). The BWM method used in this study to assign
weights to the criteria does not identify the optimum risk portfolio and
thus may affect the final decision result (Rezaei, 2015).
Researchers have developed the Mean–Variance-based models to
address supply chain risk issues, mainly arising from uncertain market
demand (Biswas et al., 2020; Liu et al., 2016; Choi and Chiu, 2012; Chiu
and Choi, 2016). However, Mean–Variance models are very sensitive to
a small change in model inputs, significantly affecting decisions (Huang
et al., 2021). Furthermore, some researchers used conditional value-at-
risk (CVaR) minimization models to investigate supplier’s risk-averse
level based on demand and pricing-related indicators (Li et al., 2014;
Soleimani et al., 2014). The main limitation of the CVaR models is that
they focus only on risk and ignore the upside potential in the asset. Keren
and Pliskin used Expected-utility (EU) maximization model and
demonstrated that this model provides an insightful and practical
interpretation of suppliers’ risk-averse behavior (Keren and Pliskin,
2006). However, this method does not consider correlated risk when
maximizing profit. The modern portfolio theory (MPT) is a widely
K. Shiralkar et al.
Table 1
Selection of SCF Solutions based on suppliers’ risk attitudes.
SCF Name Benefits
Trade Credit Cash liquidity. profit maximization benefits due to
interest earned on trade credit with extended
payment terms.
Dynamic competitive market pricing due to reduction in cost
Discounting of goods sold (COGS)
Partial trade credit Reduction in bad debts
with bank loan
Factoring “Fulfill immediate cash needs More investments in
supply chain to overcome financial inefficiencies ”
adopted method in investment fields for computing investment risk-
returns portfolios. However, one research study depicts that its risk
analysis and control methods are very meaningful for controlling supply
chain disruptions (Lao and Liu, 2007). The MPT theory attempts to
maximize portfolio expected return for a given portfolio risk level or
equivalently minimize risk for a given level of expected return. Tech­
nically, the MPT models consider an asset return as a normally distrib­
uted function, define risk as the standard deviation of return and
generate a weighted combination of assets to determine the portfolio
returns (Iyiola et al., 2012). MPT assesses risk and returns for the
portfolio based on the cumulative interaction between the assets.
Moreover, when there is a choice between low-risk and high-risk port­
folios with the same returns, MPT chooses a portfolio with a low risk
(Persson et al., 2007). In the context of Supply chain, different supplier’s
combination leads to different efficiency. Therefore, to find an effective
supplier’s combination, it is essential for firms to describe the expected
return and risks associated with each supplier. Here, the expected return
is the return that the firm obtains from the supplier and the risk refers to
the intensity that various uncertain accidents make the supplier to
deviate from the expected return. Thus, we theoretically infer that if the
suppliers chosen are up to a certain risk and the expected return that the
firm gets from them is not relevant perfectly or relevant negatively, the
risk of the supplier can be reduced, and supply chain crisis can be
controlled effectively. Therefore, the model based MPT which has
promising capability of computing optimum risk portfolio based on
expected return within acceptable risk range, can be implemented for
assessing suppliers’ payment risk portfolio more effectively.
Furthermore, the model can be extended to use the concepts of
Kraljic Matrix for categorizing suppliers based on their optimum pay­
ment risk portfolio to make supply chain finance decision making more
Fig. 1. Kraljic Matrix.
Cleaner Logistics and Supply Chain 8 (2023) 100115
When to use? Author(s)
Capital-constrained supplier Yang et al. (2021) (Yang et al., 2021);
with moderate risk-averse Jing and Seidmann, 2014 (Jing and
attitude Seidmann, 2014)
Cash rich supplier with risk- Gelsomino et al. (2016) (Gelsomino et al.,
neutral attitude 2016); Yang et al. (2021) (Yang et al.,
2021)
Capital-constrained supplier Yan et al. (2021) (Yan et al., 2021)
with high-risk seeking attitude
Cash rich supplier with high Yan et al. (2021) (Yan et al., 2021)
risk seeking attitude
efficient and manageable to the supply chain experts.
Kraljic matrix is a strategic method to assist supply chain experts to
find profit maximization opportunities by segmenting suppliers into four
classes in a 2 × 2 matrix based on purchase risk portfolio (Shiralkar
et al., 2022). Fig. 1 illustrates the Kraljic Matrix supplier segmentation
method.
Kraljic matrix uses momentary state of suppliers’ behavior while
assessing suppliers’ purchase risk portfolio. However, in real-world
practice, suppliers’ attitude is highly inconsistent depending on their
ability to face changing market conditions (Hudnurkar et al., 2016).
Moreover, abrupt supply chain disruptions put an additional random
financial burden on the suppliers, affecting their payment performance
and thus bringing inconsistency in their payment behavior. MPT can
detect this variability in supplier behavior while assessing the supplier’s
risk portfolio. Furthermore, using a weighted combination of assets and
time-based compounding of returns ensures quality in optimum risk
portfolio computation.
Therefore, we hypothesize that there is a need for two-step model
which first computes the optimum risk portfolios for suppliers using
historical payment performances data extending Modern Portfolio
Theory. Then bcay applying Kraljic Matrix approach, suppliers can be
segmented into four categories based on their optimum payment risk
payment portfolios as illustrated in Fig. 1. The Supply chain managers
then can apply appropriate SCF solutions for the suppliers of each
category. Table 2 below summarizes the difference between the prior
literature and proposed model in this study against various criteria.
3. Research methodology
This experimental study theorizes a supplier segmentation procedure
3
K. Shiralkar et al. Cleaner Logistics and Supply Chain 8 (2023) 100115

Table 2 and then generate the 2 × 2 matrix with four categories for supplier
Comparison between prior literature and proposed Model in this study. segmentation based on their optimum portfolios. Fig. 2 illustrates Flow
Criteria Prior Literature Proposed Model diagram of the proposed supplier segmentation procedure.
The analysis of reviewed literature theoretically supposes that ”%
Suppliers’ risk Partially Yes Yes
averse attitude Paid invoices” and ”Average payment days” indicators could effectively
Consideration assess supplier payment risk portfolio. Hence, we treat these indicators
Financial risk No Yes as assets for portfolio computation using the stochastic optimization
Indicators model. We subsequently discuss the different stages of the supplier
Stochastic Partially Yes Yes
techniques used
segmentation procedure. We incorporated steps 2 and 3 of the supplier
Optimum risk No Yes segmentation procedure in the stochastic optimization model for opti­
portfolio mum payment risk portfolio computation.
Computation
Model sensitivity Highly sensitive to Very less sensitive to
small changes, so small change so 3.1. Pre-processing
model reliability less model reliability
better The pre-processing step is the first step of the proposed supplier
segmentation procedure to fix any data quality issues in the input
that implements the stochastic optimization model to generate an dataset and provide standard semantics to ensure the model’s reusability
optimal payment risk portfolio for an individual supplier. The procedure with different indicators to compute optimum risk portfolio. This pro­
then uses the output of this model to define the supplier segmentation cedure assumes each performance indicator as an asset for the compu­
matrix categorizing the suppliers based on their payment risk portfolio. tation of the risk portfolio. This step also compute the correlation matrix
This experimental study uses quasi-experimental research design in for each supplier in the dataset to measure the correlation coefficients
which multiple treatments (series of optimum risk portfolios) are between two assets to determine the suppliers’ risk-averse attitude. To
applied to only one group whose members are randomly assigned for calculate the correlation, we use logarithmic changes in the returns of
what-if analysis. We discussed the different stages of the proposed assets over interval periods to ensure better accuracy and consistency in
supplier segmentation procedure in detail below. correlation computation.
We obtained the open-source payment practices dataset from Kaggle, The correlation matrix uses the cause-effect relationship and mea­
a digital community platform from Google for data scientists and ma­ sures coefficients on a scale of − 1.0 to 1.0 as shown in Eq. (1):
chine learning practitioners to develop this method. The dataset con­ Cov(rx , ry )
tains information such as supplier names, reporting period, %Paid ρxy = (1)
σx σy
Invoices, Average payment days, Standard payment days and fields
related to payment contractual terms agreed with the suppliers and Where, ρxy is Correlation between returns from the two assets X and
other business policies such as E-Invoicing, Policy coverage etc. Y. Cov(rx , ry ) is Covariance of return from asset X and Covariance of
The portfolio optimization requires optimum weight values that return from asset Y. σx is standard deviation of return from asset X. σ y is
maximize the returns while minimizing the risk. To determine these standard deviation of return from asset Y.
weights, we have enhanced the MPT-based portfolio optimization model
and introduced a new hyperparameter to generate several random risk 3.1.1. Risk portfolios simulation
portfolios. The model then chooses a portfolio that maximizes the This step is the first step of the stochastic portfolio optimization
returns with minimum risk. The procedure iteratively calls this model to model, which computes the spectrum of the supplier’s payment risk
compute optimum payment risk portfolios for all suppliers in the dataset portfolios using random weights. We discuss the numerical approach we
used for this model below.

Fig. 2. Flow diagram of Supplier Segmentation Procedure..

4
K. Shiralkar et al.
3.1.2. Portfolio expected returns
The expected returns refers to the profit or loss anticipated by a firm
from a particular supplier portfolio. To mathematically compute this, we
define Rp as a random variable to represent the return of a portfolio. Let
Ri be a random variable that represents the return of the i-th asset in the
portfolio. Let wi be the “weight” of the i-th asset in the portfolio. All
weights are real numbers between 0 and 1, and they all sum up to 1.
Hence, Rp is a weighted sum of all returns Ri, with weights wi and can be
determined by Eq. (2).
∑ should not be negative.
Rp = w i Ri (2)
i
∑ method. Mathematically, the Sharpe Ratio (Franco-Laverde et al., 2012)
Where, wi ∈ [0, 1]∀i , i wi = 1.
Using the linearity of expectation, the expected return for the port­
folio is given by Eq. (3):
∑ σp
Rp = wi E(Ri ) (3)
i
Next, we calculate percentage change in both these assets from
period i to i +1 and take log of percentage change as the log of the
returns is time additive and provide reliable and quality results due to
continuous compounding of portfolio asset returns.
Thus, the returns from an asset from period i to i +1 can be expressed
as shown in Eq. (4),
( )
Pi+1 − Pi
Ri = log × 100 (4)
Pi
where, P denotes the asset value for ith interval period.
To estimate E(Ri ) expected total returns for each individual asset
over historical data, we need to calculate mean of logarithmic returns for
each interval period and multiply it by the number of continuous in­
terval periods of reporting assets. Here, we assume that returns for each
interval period are independent and identically distributed.
3.1.3. Portfolio volatility
Portfolio Volatility is also termed as Portfolio Risk. To determine the
Portfolio Volatility, we calculated the covariance matrix to understand
how different assets behave with respect to each other. The Covariance
matrix is then multiplied with weight vectors to compute the portfolio
variance. The square root of the variance calculated determines stan­
dard deviation. This standard deviation is called as Portfolio Volatility.
Mathematically, the portfolio variance is computed using Eq. (5),
(Iyiola et al., 2012).
σ 2portfolio = (w)T .Covportfolio .w (5)
Where, Covportfolio is the covariance matrix of the portfolio. w is the
vector of weights allocated to each asset in the portfolio.
Another purpose of this step in the model is to find the efficient part
of the risk-return spectrum that maximizes the returns for a given level
of risk or minimizes risk for a given expected return level. Hence, it is
essential to find the optimal weights of assets. The model generates
random weights based on nump ortfolios hyperparameter and simulates
risk portfolios using those weights to compute the optimal weights. This
step also incorporates the logic to visualize the trend of supplier’s risk
portfolios with different weights.
3.2. Optimum risk portfolio selection
This is the optimization step of the stochastic optimization model. To
obtain the optimum risk portfolio for a supplier from a set of risk port­
folios generated in Section 3.1.1, we use the objective function (6).
5
Cleaner Logistics and Supply Chain 8 (2023) 100115
min (w)T .Covportfolio .w
subject to (w)T .μ⩾μ.Target (6)
(w)T .1 = 1
wi ⩾0
The first line in the objective function represents that the objective is
to minimize the portfolio volatility and therefore minimize the risk. The
constraints imply that the returns have to be greater than a specific
target return, the sum of all the weights should be 1, and weight values
To select optimum risk portfolio, we choose Maximum Sharpe Ratio
is defined as per Eq. (7):
Rp − Rf
SharpeRatio = (7)
Where, Rp is return of portfolio, Rf is risk-free rate, and σp is standard
deviation of the portfolio.
The procedure iteratively executes Step 3.1.1 and Step 3.2 for each
supplier in the input dataset to compute optimum financial risk
portfolio.
3.3. Supplier segmentation matrix definition
This is the final step in the proposed supplier segmentation proced­
ure. This step generates a four-quadrant matrix for supplier segmenta­
tion based on suppliers’ optimum payment risk portfolios. The X-axis of
the matrix represents Returns, and Y-axis represents the associated Risk.
Supplier segmentation is a longitudinal process and assigning the
supplier into the appropriate category could change depending upon the
evolution of its performance over time. Hence, the supplier segmenta­
tion matrix should be redefinable to put suppliers into relevant segments
for effective decision-making. In practice, the decision-making method
using the performance measure follows the normal distribution char­
acteristic (Fu et al., 2020). Hence, we assume that the distribution of
suppliers’ risk portfolios follows a normal distribution. Therefore, to
define the coordinates of the matrix’s origin, we use the mean of opti­
mum returns values of all suppliers as X-coordinate and mean of asso­
ciated risk values of all suppliers Y-coordinate. The optimum risk
portfolio of each supplier is represented in the matrix by the return value
of the optimum portfolio RP as X-Coordinate and the risk value of the
optimum portfolio σ2p as Y-coordinate. Thus, we ensure that the supplier
segmentation matrix is redefinable with the changing suppliers’ per­
formances and therefore helps to make the supplier segmentation
decision-making more effective and reliable.
To mathematically compute the coordinates of supplier segmenta­
tion matrix origin, consider O(x, y) as origin of Matrix. Thus, the co­
ordinates x and y of the matrix origin are defined by the Eq. (8).
( )
1∑ n
1∑ n
O(x, y) = Rpi , σ2pi (8)
n i=1 n i=1
Where, n is Number of suppliers, Rpi is return of optimum portfolio of
each supplier, and σ2pi is risk of optimum portfolio of each supplier.
4. Results and discussion
We transformed the proposed supplier segmentation procedure into
a computer-assisted intelligent method using Python. The automated
method uses the Python Pandas library to prepare the input dataset for
numerical analysis. Furthermore, this method uses Python’s NumPy li­
brary to carry out the numerical steps of the stochastic portfolio opti­
mization model and supplier segmentation matrix definition. This
method then generates rich graphs and charts to visualize the outputs of
different stages of the supplier segmentation procedure using Python’s
matplotlib and mplcursors library.
K. Shiralkar et al.
We used historical payment practices data for 20 suppliers to
implement this method. We choose the value of hyperparameter
num_portfolio as 100 to compute the supplier’s optimum payment risk
portfolio. Fig. 3 below illustrates the relationship graph produced by the
method indicating the correlation patterns between two indicators
observed for suppliers in the dataset. Each indicator is termed as a
feature in this relationship graph. The scatter plot shows the relationship
between the two features, and the diagonal plot showcases the histo­
gram to visualize a feature’s probability distribution.
The analysis of Fig. 3 implies that for suppliers with positive corre­
lation, a strong correlation exists between two indicators. Thus, we
deduce that extending the payment terms for these suppliers signifi­
cantly increases the account receivables. On the other hand, for sup­
pliers with negative correlation, the correlation between two indicators
was found to be strong for some suppliers and weak for others. Thus, it
indicates that for these suppliers, extending the payment terms may not
increase the account receivables.
The algorithm of the stochastic optimization model generates 100
random risk portfolios for each supplier because the value of the
num_portfolio hyperparameter is configured to 100. Fig. 4 illustrates the
risk portfolio spectrum for SUPPLIER20 in the dataset for model
outcome analysis purpose. The red star represents the minimum vola­
tility portfolio, and the green star represents the optimum volatility
portfolio for the supplier.
The interpretation of Fig. 4 indicates that the optimum risk portfolio
of SUPPLIER20 provides a 32% return, and the corresponding risk
associated with this supplier is 51%. The corresponding weights
assigned to obtain the optimum portfolio for SUPPLIER20 would be
0.998 for the % Paid invoices indicator and 0.0112 for the Average
payment days indicator. Thus, to maximize the returns from SUP­
PLIER20, the firm should give more attention to find alternatives to
increase the account receivables instead of extending payment terms.
The proposed method iteratively executes the stochastic optimiza­
tion model to compute the optimum payment risk portfolio for each
supplier in the input dataset and generates the supplier segmentation
matrix using the logic explained in the Supplier Segmentation Matrix
definition step of the proposed supplier segmentation procedure. The
four quadrants of the supplier segmentation matrix are programmed to
confirm with Kraljic Matrix nomenclature, as portrayed in Fig. 1. The
method also shows the relevant metrics of each supplier’s optimum risk
portfolio using tooltips.
Fig. 5 below illustrates how the intelligent method categorizes the
suppliers into four segments by assessing their optimum payment risk
Fig. 3. Relationship graph showing the correlation patterns between two indicators for suppliers.
6
Cleaner Logistics and Supply Chain 8 (2023) 100115
portfolio. Furthermore, we discuss how this supplier segmentation ma­
trix and portfolio metrics of each supplier provide cognitive interpre­
tation about the supplier behavior and its risk-aversion attitude so that
supply chain managers can apply an effective supply chain financing
strategy to their suppliers.
Low Returns & Low Risk Category: The method terms this category of
suppliers as Basic. Suppliers belonging to this category give low returns
for a given risk level. Also, the risk associated with these suppliers to
achieve the targeted returns is low. Thus, the suppliers from this cate­
gory have a low potential to add value to improve supply chain per­
formance. The literature review indicated that suppliers from this
category have limited financial impact on the supply chain. Hence, firms
should work on reducing the supply chain risk jointly to minimize losses.
The analysis of the optimum risk portfolio of each supplier of this
category indicates that the method has assigned more weightage to the
Average Payment Days indicator in their optimum risk portfolio. Thus, it
means that suppliers from this category perform well when the firm
extends payment terms to them. Therefore, we imply that the suppliers
from this category could be capital-constrained but also have a low
potential to increase the firm’s performance.
High Returns & Low Risk Category: The method terms this category of
suppliers as Leverage. Suppliers belonging to this category give high
returns for a given risk level. Moreover, the risk associated with these
suppliers to achieve the targeted returns is low. Thus, the suppliers from
this category are the best value providers. These suppliers have the
potential to handle expected disruptions. The literature review analysis
portrays that firms should emphasize reducing the cost by taking
advantage of the competitiveness of the supplier. Firms may invest in
those suppliers to mitigate their short-term cash needs and exploit their
strengths to reduce supply chain bottlenecks.
The analysis of the optimum risk portfolio of each supplier from this
category shows that the method has assigned more weightage to the
Average Payment Days indicator for certain suppliers. In contrast, for
other suppliers, more weightage is given to the % Paid invoices indicator
in their optimum risk portfolio. Thus, it implies that suppliers from this
category with higher weightage to the Average Payment Days indicator
could be capital-constrained and therefore provide higher returns on the
extension of the payment term. The suppliers from this category with
higher weightage to the % Paid invoices indicator signifies that these
suppliers have adequate cash liquidity and have a high potential to
improve the firm’s performance.
Low Returns & High Risk Category: The method terms this category of
suppliers as Bottleneck. Suppliers in this category give low returns for a
K. Shiralkar et al. Cleaner Logistics and Supply Chain 8 (2023) 100115

Fig. 4. Supplier Risk portfolio spectrum.

Fig. 5. Supplier Segmentation Matrix.

given risk level. Besides, the risk associated with these suppliers to
achieve the targeted returns is high. Thus, the suppliers from this cate­
gory have a low potential to add value to improve supply chain per­
formance. These suppliers usually have quality and service issues and
hence could adversely impact supply chain performance and resiliency.
As per the literature review, firms need to focus on cost and risk mini­
mization and develop new suppliers to replace them.
The analysis of the optimum risk portfolio of each supplier from this
category implies that the method assigns higher weightage to the % Paid
invoices indicator. Thus, it indicates that these suppliers could have a
risk-averse attitude. Besides this, because of quality issues with their
services, they could potentially be detrimental to the firm’s supply chain
business in terms of stability and efficiency. .
High Returns & High Risk Category: The method terms this category of
suppliers as Strategic. Suppliers falling under this category give high
returns for a given risk level. Moreover, the risk associated with these
suppliers to achieve the targeted returns is also high. The suppliers from
this category ensure long-term profitable growth of the supply chain
business and are critical for competitive advantage. The literature re­
view emphasized exploiting these suppliers’ strengths on product and
process innovation to eliminate bottlenecks for the long-term sustain­
ability of the supply chain. Firms should also focus on profit maximi­
zation leveraging the competitive advantage of these suppliers.
Analyzing the optimum risk portfolio of each supplier from this
category implies that the method assigns higher weightage to the % Paid
invoices indicator. Thus, it indicates that these suppliers have adequate
working capital and the potential to be the strategic partner for the firm
for long-term benefits.

7
K. Shiralkar et al. Cleaner Logistics and Supply Chain 8 (2023) 100115

The analysis of the supplier segmentation matrix further indicates Table 3

the firm’s level of exposure to risk. For example, the analysis of the Recommended SCF Solutions For Different Supplier Segmentation Categories.
supplier segmentation matrix illustrated by Fig. 5 implies that the input Segmentation Recommended SCF Why?
dataset used in this study has a significant number of suppliers falling Category Solution
under the Bottleneck category. On the contrary, the number of suppliers Basic Partial Trade Credit Capital-constrained
in the Strategic category is significantly less. Thus, it infers that the firm with bank loan suppliers with risk-
has a high level of exposure to financial risk. Therefore, supply chain averse attitude. Hence,
experts need to prioritize exploring new suppliers and promoting new minimize bad debts by
insisting suppliers to
ways to develop more strategic partners. opt for partial bank loan
and provide partial
4.1. Validation of results credit to meet its
immediate cash needs.
Leverage Trade credit for Profit maximization
The stochastic optimization model used in the proposed method is
capital - constrained benefit by offering
validated for robustness using parameter sensitivity analysis. For para­ supplier trade credit for capital-
metric sensitivity analysis, we selected one supplier from each category constrained suppliers.
of the supplier segmentation matrix illustrated in Fig. 5 for sensitivity Factoring for Leverage investments in
analysis. The sensitivity analysis is performed by generating the opti­ suppliers with the supply chain to
adequate working maintain adequate cash
mum payment risk portfolios of the four suppliers by using different capital flow with the working
values for the num_portfolio hyperparameter to validate the consistency capital available with
of the model. We used systematic sampling to select values for the the cash-rich suppliers.
num_portfolio hyperparameter to ensure randomization in optimum Bottleneck Dynamic Discounting Minimize the bad debts
by encouraging
payment risk portfolios computation for each supplier. We chose a
suppliers for early
scatter plot to give direct visual indication of sensitivity. Fig. 6 illustrates payment by offering
the seaborn scatter plot portraying the sensitivity of the stochastic discounts.
optimization model. Strategic Factoring Cash-rich suppliers who
The systematic analysis of the scatter plot in Fig. 6 indicates that the are ready to take risk in
the business and hence
model is reasonably robust to provide suppliers’ optimum payment risk encourage them by
portfolios consistently with different values of num_portfolio giving discounts on
hyperparameter. early payments.

5. Managerial implications
to varying operational expenses caused by changing market conditions.
Hence, supply chain managers need revaluation of suppliers’ financial
Recent COVID-19 pandemic-driven supply chain disruption has
risk regularly so that they can act promptly to minimize firm’s losses.
pushed supply chain experts to rethink their supply chain financing
The proposed intelligent method can recompute suppliers’ risk exposure
strategies to secure the financial strength of the supply chain for future
when desired by supply chain managers so that they can rethink their
crises.Table 3 demonstrates how the proposed method provides intelli­
supplier relationship strategy to ensure supply chain efficiency and
gence to supply chain managers in selecting appropriate SCF finance
resiliency.
solutions for different supplier groups.
With the realization of the proposed intelligent method into practice,
In real-world practice, the supplier’s financial health fluctuates due

Fig. 6. Scatter plot portraying sensitivity of the stochastic optimization model.

8
K. Shiralkar et al.
the scope of work of supply chain managers is limited to business-centric
activities as below:
• Measure the effectiveness of existing SCF solutions on overall supply
chain performance.
• Rethink supply chain finance strategies that holistically consider
end-to-end financial transactions within the supply chain and rede­
sign the existing SCF solutions based on those considerations.
• Define thresholds for weights of payment performance indicators to
assign appropriate SCF solutions to a sub-group of suppliers within
each group of supplier segmentation matrix.
• Define criteria for level of engagement for each supplier group and
work on building appropriate strategies with them to improve
overall supply chain coordination and performance.
• Intermittent quality check to validate the consistency in the perfor­
mance of the recommendation system and retrain the system if
required by reconfiguring the value of num_portfolio
hyperparameter.
On the other hand, implementing an intelligent method into an AI-
driven recommendation system will automate below tasks.
• Connect to source data systems to gather historical data of suppliers’
payment practices
• Pre-processing step to integrate and validate the payment practices
data of suppliers for accuracy and completeness.
• Optimum payment risk portfolio computation for each supplier using
simulations to compute payment risk portfolio spectrum for each
supplier and choose optimum payment risk portfolio.
• Aggregate all suppliers’ optimum payment risk portfolios and
compute supplier segmentation matrix to group suppliers based on
their portfolios.
• Provide recommendations with reasoning for SCF solution to each
supplier group or sub-group of suppliers within a group based on the
weights assigned to payment performance indicators within the
portfolio of each supplier.
• Redefine supplier segmentation matrix and recommendations when
new payment practices data is added or existing data is updated to
improve the effectiveness of supply chain financing.
Thus, the proposed intelligent method automates more complex and
repetitive tasks of supplier chain managers and offers necessary intel­
lectual thinking to let them work on business-centric innovations to
make the supply chain more efficient and profitable.
6. Conclusion
This research study contributes to the industry and research litera­
ture by conceptualizing the intelligent method for selecting supply chain
finance solutions using supplier segmentation. Thus, it enables supply
chain managers to concentrate on more business-centric innovations to
improve supply chain efficiency and profitability, bringing significant
positive managerial implications.
The stochastic optimization and simulation model used in the pro­
posed conceptual method detects uncertainties in suppliers’ payment
behavior more efficiently and thus improves quality of supply chain
finance decision-making. This research study also emphasizes that
supplier segmentation and supply chain financing are logically insepa­
rable. Perhaps supplier segmentation makes the supply chain finance
decision-making more logical, efficient, and manageable for supply
chain managers. Besides this, supplier segmentation empowers supply
chain managers to identify suppliers who are vital to them so that they
give appropriate attention to improve engagement for superior supply
chain performance.
9
Cleaner Logistics and Supply Chain 8 (2023) 100115
6.1. Limitations and future scope of research
The proposed method being a mathematical model has a limitation
in that it may not detect unusual situations which cannot be predicted
using historical data. Therefore, it may not be able to produce accurate
insights for effective supply chain finance decision-making all the time.
In future studies, this method can be extended to include more cat­
egories into the supplier segmentation matrix and more indicators for
risk portfolio computation to make it more inclusive. Furthermore, we
observe the randomness in the variation of optimum risk portfolio for
some suppliers using this method, which requires more investigation in
future studies.
Declaration of Competing Interest
The authors declare that they have no known competing financial
interests or personal relationships that could have appeared to influence
the work reported in this paper.
Data availability
No data was used for the research described in the article.
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