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Dynamic Inventory Management with Inventory‐based Financing

Dynamic Inventory Management with Inventory‐based Financing This study considers a stochastic inventory management problem where a capital‐constrained firm can obtain additional working capital through inventory‐based financing (IBF) by pledging its inventory to obtain loans from a lender. We show that the firm's optimal inventory policy in each period may order new inventory up to a state‐dependent order‐up‐to level subject to the firm's capital and IBF loan constraints, or salvage existing inventory down to a state‐dependent salvage‐down‐to level. We further partially characterize the structures of the two state‐dependent levels in each period. Through analytical and numerical studies, we offer a number of new insights regarding the optimal inventory management for a capital‐constrained firm with access to inventory‐based financing. In particular, we find that when the firm anticipates a shortage of capital with which to meet high demands in a future period, it may strategically over‐stock its inventory in earlier periods in order to secure the necessary capital. Through extensive numerical studies, our study also demonstrates how some of the key parameters may affect the optimal inventory policy and the value of IBF. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Production and Operations Management Wiley

Dynamic Inventory Management with Inventory‐based Financing

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References (2)

Publisher
Wiley
Copyright
© 2021 Production and Operations Management Society
ISSN
1059-1478
eISSN
1937-5956
DOI
10.1111/poms.13323
Publisher site
See Article on Publisher Site

Abstract

This study considers a stochastic inventory management problem where a capital‐constrained firm can obtain additional working capital through inventory‐based financing (IBF) by pledging its inventory to obtain loans from a lender. We show that the firm's optimal inventory policy in each period may order new inventory up to a state‐dependent order‐up‐to level subject to the firm's capital and IBF loan constraints, or salvage existing inventory down to a state‐dependent salvage‐down‐to level. We further partially characterize the structures of the two state‐dependent levels in each period. Through analytical and numerical studies, we offer a number of new insights regarding the optimal inventory management for a capital‐constrained firm with access to inventory‐based financing. In particular, we find that when the firm anticipates a shortage of capital with which to meet high demands in a future period, it may strategically over‐stock its inventory in earlier periods in order to secure the necessary capital. Through extensive numerical studies, our study also demonstrates how some of the key parameters may affect the optimal inventory policy and the value of IBF.

Journal

Production and Operations ManagementWiley

Published: May 1, 2021

Keywords: ; ; ;

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