Operations Dept. Seminar-Kevin Shang

Speaker(s): Kevin Shang -Duke University

Date & Time: Friday, Nov. 20, 2015 from 9 a.m. to 10:30 p.m.

This paper considers an entrepreneurial rm that periodically orders inventory to satisfy demand in a nite horizon. The rm oers trade credit to its customer while receiving one from its supplier. In addition to standard inventory-related costs, cash-related costs are incurred in each period. The cash-related cost is composed of a default penalty cost due to a cash shortage and an interest gain (negative cost) due to excess cash after inventory payments. The objective is to obtain an inventory policy that maximizes the working capital at the end of the horizon. We show that this problem is equivalent to that of minimizing the total inventory related cost and the cash-related cost in the horizon. The model with ample cash reduces to the traditional inventory model. For the general model, we prove that a state-dependent policy is optimal. To facilitate implementation and reveal insights, we consider a simplied model in which a myopic policy is optimal. A numerical study suggests that the myopic policy is eective for the original system. The myopic policy generalizes the classic base-stock policy and resembles practical working capital management under which rms make inventory decisions according to their working capital status. The policy parameters have closed-form expressions, which show the impact of demand and cost parameters on the inventory decision. Our study assesses the value of considering nancial ows when the rm makes the inventory decision and reveals insights that are consistent with empirical ndings in the literature.

Fee: [Yes/No/Varies]

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Attachment: Shang paper

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