557
Views
16
CrossRef citations to date
0
Altmetric
Article

Inventory management under working capital constraints

, &
Pages 62-74 | Received 07 Jan 2016, Accepted 27 Jul 2016, Published online: 19 Dec 2017
 

Abstract

The objective of inventory management models is to determine effective policies for managing the trade-off between customer satisfaction and the cost of service. Over the years, these models have become increasingly sophisticated, incorporating many complicating factors that are relevant in practice such as demand uncertainty, finite supplier capacity, and yield losses. Curiously absent from these models are the financial constraints imposed by working capital requirements. In practice, however, many firms are self-financing, i.e., their ability to replenish their own inventories is directly affected not only by their current inventory levels, but also by their receivables (trade credit they have extended to their customers) and payables (trade credit they have received from their supplier). Such constraints have gained added significance during the lingering economic crisis, which has made external financing increasingly difficult to secure. In this paper, we analyze the materials management practices of a self-financing firm whose replenishment decisions are constrained by cash flows, which are updated periodically following purchases and sales in each period. In particular, we investigate through simulation the interaction between the financial and operational parameters as well as the impact of working capital constraints on the long-run average costs per period. Our study shows that arbitrarily imposed constraints on the working capital not only fail to prevent violations, but also significantly distort operational decisions.

Acknowledgments

This work has been completed while the first author was working as a post-doctoral fellow at INSEAD whose financial support is gratefully acknowledged. We also thank the editors and the reviewers for their detailed comments that helped us in producing a better manuscript.

Reprints and Corporate Permissions

Please note: Selecting permissions does not provide access to the full text of the article, please see our help page How do I view content?

To request a reprint or corporate permissions for this article, please click on the relevant link below:

Academic Permissions

Please note: Selecting permissions does not provide access to the full text of the article, please see our help page How do I view content?

Obtain permissions instantly via Rightslink by clicking on the button below:

If you are unable to obtain permissions via Rightslink, please complete and submit this Permissions form. For more information, please visit our Permissions help page.