Inventory Management with Working Capital Restrictions

Working capital restrictions can have disruptive effects on the coordination of the operations and finances of a company. Working capital restrictions may limit the inventory ordering power, reduce revenues, and increase the use of high premium debt. It may restrict the use of marketing and dynamic pricing decisions intended to smooth the variations of demand and revenues that result from the stochastic nature of the product life cycle. Given working capital’s multiplex composition and cost structure, its study requires careful assumptions to adequately capture its effects on the operational and financial sides. For this dissertation, we develop three models that explicitly take into account working capital restrictions. For the first research project, we build on a single-product finite-horizon periodic-review inventory management setting and include key financial aspects such as working capital constraints, payment delays and multiple sources of financing. While the Modigliani and Miller’s irrelevance principle establishes that the financial choices of a firm do not play a role in its valuation, our exploratory study examines the robustness of this result in a richer setting which intrinsically departs from their assumptions. Our numerical experiments show that when short-term debt as such becomes prohibitive or when downstream payment delays increase, the required working capital inflates rapidly. For the second research project, we study how a company should combine its inventory, product launch and marketing decisions to coordinate the operations and finances of a product portfolio that is working capital constrained. Our results show that the product portfolio benefits greatly from the joint management, reducing the amount of working capital required per product, and increasing the benefits per allocated working capital. For the last research project, we study how a company should combine its inventory, product launch and dynamic pricing decisions to coordinate the operations and finances of a product portfolio that is working capital constrained. We find that optimal product launch and pricing decisions help avoid simultaneous peak demands and simultaneous product launches. However, we find that working capital constraints can have strong negative effects on profits and may force not to launch a product in the worst cases.