Dynamic inventory control with limited capital and short‐term financing

For most firms, especially the small‐ and medium‐sized ones, the operational decisions are affected by their internal capital and ability to obtain external capital. However, the majority of the literature on dynamic inventory control ignores the firm's financial status and financing issues. An important question that arises is: what are the optimal inventory and financing policies for firms with limited internal capital and limited access to external capital? In this article, we study a dynamic inventory control problem where a capital‐constrained firm periodically purchases a product from a supplier and sells it to a market with random demands. In each period, the firm can use its own capital and/or borrow a short‐term loan to purchase the product, with the interest rate being nondecreasing in the loan size. The objective is to maximize the firm's expected terminal wealth at the end of the planning horizon. We show that the optimal inventory policy in each period is an equity‐level‐dependent base‐stock policy, where the equity level is the sum of the firm's capital level and the value of its on‐hand inventory evaluated at the purchasing cost; and the structure of the optimal policy can be characterized by four intervals of the equity level. Our results shed light on the dynamic inventory control for firms with limited capital and short‐term financing capabilities.Copyright © 2014 Wiley Periodicals, Inc. Naval Research Logistics 61: 184–201, 2014Peer Reviewedhttp://deepblue.lib.umich.edu/bitstream/2027.42/106828/1/nav21576.pd

Optimal financial and ordering decisions of a firm with insurance contract

This paper examines the impact of a bank’s risk limit on the financial and ordering decisions of a capital-constrained firm with insurance contract. All our major results can be computed via explicit expressions. It is shown that the bank will control its risk to be below the risk limit through setting a loan limit and the firm can make the loan limit increase by buying a deductible insurance policy. It is also shown that the repayment demand level needed to avoid bankruptcy will not be affected by the insurance policy. We derive the firm’s optimal ordering quantity and insurance coverage level under a downside risk measurement and a variance risk measurement separately. It is shown that the firm should pay more attention to whether to buy insurance or not under the downside risk measurement and how much insurance coverage to buy under the variance risk measurement. Under the downside risk measurement, once the firm decides to buy insurance, the optimal coverage level is independent of the bank’s risk limit. We also show that the insurance contract has a more obvious effect on the profit increases when the selling price is high or the bank’s risk limit is low. First published online: 18 Jun 201

Capital constrained supply chain problem.

Chen, Chen.Thesis (M.Phil.)--Chinese University of Hong Kong, 2010.Includes bibliographical references (p. 89-94).Abstracts in English and Chinese.Table of Contents --- p.viChapter 1 --- Introduction --- p.1Chapter 2 --- Literature Review --- p.6Chapter 2.1 --- Operations and Finance Interface --- p.6Chapter 2.1.1 --- Single Period Setting --- p.6Chapter 2.1.2 --- Multi-Period Setting --- p.11Chapter 2.2 --- Trade Credit --- p.13Chapter 2.3 --- Supply Chain Contracts --- p.14Chapter 3 --- The Model --- p.16Chapter 3.1 --- Model Description --- p.16Chapter 3.1.1 --- The Basic Setting --- p.17Chapter 3.1.2 --- The Bank Loan Setting --- p.19Chapter 3.1.3 --- The Trade Credit Setting --- p.19Chapter 3.2 --- Demand Distribution Properties --- p.22Chapter 4 --- Retailer's Perspective --- p.24Chapter 4.1 --- The Single Period Problem --- p.24Chapter 4.2 --- The Basic Setting --- p.33Chapter 4.3 --- The Bank Loan Setting --- p.37Chapter 4.4 --- The Trade Credit Setting --- p.43Chapter 4.5 --- Summary --- p.47Chapter 5 --- Supplier's Perspective --- p.48Chapter 5.1 --- Single Period Results --- p.48Chapter 5.1.1 --- The Basic Setting --- p.49Chapter 5.1.2 --- The Bank Loan Setting --- p.53Chapter 5.1.3 --- The Trade Credit Setting --- p.60Chapter 5.2 --- Two-Period Problem --- p.69Chapter 5.3 --- Summary --- p.71Chapter 6 --- Numerical Study and Insights --- p.72Chapter 6.1 --- The Single Period Supply Chain --- p.72Chapter 6.1.1 --- Impact of Different Financing Schemes --- p.73Chapter 6.1.2 --- Supply Chain Efficiency --- p.77Chapter 6.2 --- Capital Constrained Retailer in Two-Period Setting --- p.79Chapter 6.2.1 --- Impacts of Different Financial Schemes on the Retailer --- p.79Chapter 6.2.2 --- Saving for the Future --- p.82Chapter 6.2.3 --- Comparison of the Single- and Two-Period Settings --- p.83Chapter 7 --- Conclusion and Future Research --- p.84AppendixA Log-concavity of Some Common Distributions --- p.87Bibliography --- p.8

Managing Material and Financial Flows in Supply Chains

<p>This dissertation studies the integration of material and financial flows in supply chains, with the goal of examining the impact of cash flows on the individual firm's decision making and the overall supply chain efficiency. We develop analytical models to provide effective policy recommendations and derive managerial insights.</p><p>We first consider a credit-constrained firm that orders inventory to satisfy stochastic demand in a finite horizon. The firm provides trade credit to the customer and receives it from the supplier. A default penalty is incurred on the unfulfilled payment to the supplier. We utilize an accounting concept of working capital to obtain optimal and near-optimal inventory policies. The model enables us to suggest an acceptable purchasing price offered in the supplier's trade credit contract, and to demonstrate how liquidity provision can mitigate the bullwhip effect. We then study a joint inventory and cash management problem for a multi-divisional supply chain. We consider different levels of cash concentration: cash pooling and transfer pricing. We develop the optimal joint inventory replenishment and cash retention policy for the cash pooling model, and construct cost lower bounds for the transfer pricing model. The comparison between these two models shows the value of cash pooling, although a big portion of this benefit may be recovered through optimal transfer pricing schemes. Finally, we build a supply chain model to investigate the material flow variability without cash constraint. Our analytical results provide conditions under which the material bullwhip effect exists. These results can be extended to explain the similar effect when financial flows are involved. In sum, this dissertation demonstrates the importance of working capital and financial integration in supply chain management.</p>Dissertatio