Precautionary replenishment in financially-constrained inventory systems subject to credit rollover risk and supply disruption

Oleg Sokolinskiy (), Benjamin Melamed () and Ben Sopranzetti ()
Additional contact information
Oleg Sokolinskiy: Rutgers University
Benjamin Melamed: Rutgers University
Ben Sopranzetti: Rutgers University

Annals of Operations Research, 2018, vol. 271, issue 2, No 26, 997 pages

Abstract: Abstract We consider a limited-liability firm that owns a finite single-product inventory subject to periodic-review replenishment and a corporate treasury that mediates the firm’s financial transactions related to inventory operations. The firm may elect to borrow money to purchase product via a revolving line of credit, secured by a compensating balance which determines the credit limit. The line of credit is subject to rollover risk, namely, each period the funding entity may, with some probability, refuse to roll over the line of credit. In response, the firm can search for an alternate funding entity, but in so doing it may incur search costs, primarily in the form of lost sales. The firm optimizes inventory replenishment order sizes and decides whether it should declare bankruptcy, as function of its inventory and available capital. The recent credit crunch has rendered illiquidity a critical concern for funding and operating decisions in enterprises. This paper addresses optimal inventory management in the face of liquidity shocks and supply disruptions. We show that rollover risk and supply disruption are important considerations for firms that rely on external funding. Rollover risk alone results in optimal inventory replenishment policies that differ materially from those specified by traditional supply chain models; differences manifest as state-dependent precautionary replenishment or cash hoarding. Inventory management models which fail to take rollover risk and supply disruption risk into account can prescribe suboptimal replenishment policies. Such policies would generate suboptimal profits for firms that rely on short-term financing to fund their working capital.

Keywords: Bankruptcy; Financial constraints; Inventory control; Precautionary replenishment; Rollover risk; Supply disruption (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://link.springer.com/10.1007/s10479-018-2965-1 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:annopr:v:271:y:2018:i:2:d:10.1007_s10479-018-2965-1

Ordering information: This journal article can be ordered from
http://www.springer.com/journal/10479

DOI: 10.1007/s10479-018-2965-1

Access Statistics for this article

Annals of Operations Research is currently edited by Endre Boros

More articles in Annals of Operations Research from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().