Precautionaryreplenishmentinfinancially-constrained inventorysystemssubjecttocreditrolloverriskandsupply disruption

Collection Location Koleksi E-book & E-Journal Perpustakaan Pusat Unila
Edition vol.271issue 2
Call Number
ISBN/ISSN 15729338
Author(s) Sokolinskiy, Oleg
Melamed, ·Benjamin
Sopranzetti, ·Ben
Subject(s) Business and Management
Classification NONE
Series Title
GMD E-Journal
Language English
Publisher Springer
Publishing Year 2018
Publishing Place Switzerland
Abstract/Notes Abstract We consider a limited-liability firm that owns a finite single-product inventory subject to periodic-review replenishment and a corporate treasury that mediates the firm’s financial transactionsrelatedtoinventoryoperations.Thefirmmayelecttoborrowmoneytopurchase product via a revolving line of credit, secured by a compensating balance which determines the credit limit. The line of credit is subject to rollover risk, namely, each period the funding entity may, with some probability, refuse to roll over the line of credit. In response, the firm cansearchforanalternatefundingentity,butinsodoingitmayincursearchcosts,primarily intheformoflostsales.Thefirmoptimizesinventoryreplenishmentordersizesanddecides whether it should declare bankruptcy, as function of its inventory and available capital. The recent credit crunch has rendered illiquidity a critical concern for funding and operating decisions in enterprises. This paper addresses optimal inventory management in the face of liquidity shocks and supply disruptions. We show that rollover risk and supply disruption are important considerations for firms that rely on external funding. Rollover risk alone resultsinoptimalinventoryreplenishmentpoliciesthatdiffermateriallyfromthosespecified by traditional supply chain models; differences manifest as state-dependent precautionary replenishment or cash hoarding. Inventory management models which fail to take rollover riskandsupplydisruptionriskintoaccountcanprescribesuboptimalreplenishmentpolicies. Such policies would generate suboptimal profits for firms that rely on short-term financing to fund their working capital.
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