Managing inventory and production capacity in start-up firms

Abstract

We consider the problem of managing inventory and production capacity in a start-up manufacturing firm with the objective of maximising the probability of the firm surviving as well as the more common objective of maximising profit. Using Markov decision process models, we characterise and compare the form of optimal policies under the two objectives. This analysis shows the importance of coordination in the management of inventory and production capacity. The analysis also reveals that a start-up firm seeking to maximise its chance of survival will often choose to keep production capacity significantly below the profit-maximising level for a considerable time. This insight helps us to explain the seemingly cautious policies adopted by a real start-up manufacturing firm.

Keywords:

• start-up firms
• inventory
• production capacity
• stochastic modelling
• Markov decision process

Acknowledgements

We are honoured to be part of this special issue in memory of Doug White. One of us (LT) was privileged to learn about Markov decision processes directly from White, and his friendship, kindness and research leadership will always be remembered. White introduced one of the earliest production capacity-planning problems in his book Dynamic Programming (White, 1969), and was always interested in the application of Markov decision processes to real problems (White, 1985, 1988, 1993). We are all grateful for the influence Doug had on research in this and many other areas of decision theory and operational research.