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The Effects of Financial Risks on Inventory Policy

Author

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  • Peter Berling

    (Department of Industrial Management and Logistics, Lund University, P.O. Box 118, SE-221 00 Lund, Sweden)

  • Kaj Rosling

    (School of Technology and Design, Växjö University, SE-351 95 Växjö, Sweden)

Abstract

The effect of financial risks on (R, Q) inventory policies is analyzed in a real options framework. Simple adjustments of the usual formulas for R and Q are suggested and tested. Stochastic demand and purchase costs are considered, both with known systematic (business-cycle-related) risk. The systematic risk of stochastic demand has typically a negligible effect on the optimal values of R and Q, although an improvement may be achieved by a simple adjustment of R. The systematic risk of the purchase price, c, has a significant effect on R and Q. The capital holding cost should be estimated as r \cdot c, where r is the sum of the risk-free interest rate, the expected price decrease, and the risk premium associated with the systematic risk of c. For goods quoted on commodity exchanges, r may be estimated directly from the prices on forward contracts. Its size (and sign) varies considerably for different commodities.

Suggested Citation

  • Peter Berling & Kaj Rosling, 2005. "The Effects of Financial Risks on Inventory Policy," Management Science, INFORMS, vol. 51(12), pages 1804-1815, December.
    • Handle: RePEc:inm:ormnsc:v:51:y:2005:i:12:p:1804-1815
    DOI: 10.1287/mnsc.1050.0435
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    17. Peter Berling & Victor Martínez-de-Albéniz, 2011. "Optimal Inventory Policies when Purchase Price and Demand Are Stochastic," Operations Research, INFORMS, vol. 59(1), pages 109-124, February.
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    19. Niu, Baozhuang & Chu, Lap-Keung & Ni, Jian & Wang, Junwei, 2018. "Buy now and price later: Supply contracts with time-consistent mean–variance financial hedgingAuthor-Name: Li, Qiang," European Journal of Operational Research, Elsevier, vol. 268(2), pages 582-595.
    20. Li, Bo & Arreola-Risa, Antonio, 2017. "Financial risk, inventory decision and process improvement for a firm with random capacity," European Journal of Operational Research, Elsevier, vol. 260(1), pages 183-194.
    21. Berling, Peter, 2008. "Holding cost determination: An activity-based cost approach," International Journal of Production Economics, Elsevier, vol. 112(2), pages 829-840, April.
    22. Trigeorgis, Lenos & Tsekrekos, Andrianos E., 2018. "Real Options in Operations Research: A Review," European Journal of Operational Research, Elsevier, vol. 270(1), pages 1-24.
    23. Suresh P. Sethi & Sushil Gupta & Vipin K. Agrawal & Vijay K. Agrawal, 2022. "Nobel laureates’ contributions to and impacts on operations management," Production and Operations Management, Production and Operations Management Society, vol. 31(12), pages 4283-4303, December.

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