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Dynamic Inventory Management with Inventory‐based Financing

Author

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  • Ke Fu
  • Xiting Gong
  • Vernon N. Hsu
  • Jiye Xue

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.

Suggested Citation

  • Ke Fu & Xiting Gong & Vernon N. Hsu & Jiye Xue, 2021. "Dynamic Inventory Management with Inventory‐based Financing," Production and Operations Management, Production and Operations Management Society, vol. 30(5), pages 1313-1330, May.
    • Handle: RePEc:bla:popmgt:v:30:y:2021:i:5:p:1313-1330
    DOI: 10.1111/poms.13323
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    References listed on IDEAS

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