Dynamic Inventory Control with Cash Flow Constraints

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By: Xiuli Chao (from IFORS News December 2012)

The majority of the literature on inventory theory ignores the cash flow and assumes that the firm always has enough capital to implement any operational decisions (see, e.g., Zipkin, 2000). Such ignorance may be justified by the seminal paper of Modigliani and Miller (1958), which shows that a firm’s operational and financial decisions can be made separately in a perfect capital market. However, in practice, most of the firms (especially the start-up, small- and medium- sized ones) do not operate in perfect capital markets and their operational decisions are affected by their internal capital and ability to obtain external capital such as bank loans, equity and venture capital investment. Indeed, according to a report from the Federal Reserve Bank of New York, for firms with limited access to capital markets, internal funds are a significant predicator of inventory investment

Link to material: http://ifors.org/wiki/tutorials-newsletter/dynamic-inventory-control.pdf

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