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Managing Disruption Risk Over the Product Life Cycle

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  • de Matta, Renato
  • Hsu, Vernon

Abstract

This paper uses a mixed integer programming model to study a production and inventory planning problem faced by a manufacturer who utilizes Inventory-Based Financing (IBF) to capture additional demands during peak seasons that otherwise will not be met due to a shortage of working capital. By exploiting the problem’s inherent structure of three distinct but related manufacturer decisions, i.e., the production, financing and working capital allocation decisions, the paper develops a branch-and-bound procedure to solve the model which is shown to be NP-hard. Through a series of numerical experiments, our study provides a number of interesting managerial insights into how the manufacturer’s optimal production and inventory plans could differ with and without IBF. Specifically, we find that (a) the manufacturer would strategically overstock his inventory for the purpose of securing more loans, and this overstocking behavior is more acute in periods immediately prior to the peak demand period; and (b) the manufacturer could take advantage of the difference in peak and non-peak seasons of product demands by partially financing the production of one product through pledging the cycle inventory of another product.

Suggested Citation

  • de Matta, Renato & Hsu, Vernon, 2020. "Managing Disruption Risk Over the Product Life Cycle," Foundations and Trends(R) in Technology, Information and Operations Management, now publishers, vol. 14(1-2), pages 121-137., October.
    • Handle: RePEc:now:fnttom:0200000096-7
    DOI: 10.1561/0200000096-7
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    References listed on IDEAS

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    1. Nadarajah, Selvaprabu & Margot, François & Secomandi, Nicola, 2017. "Comparison of least squares Monte Carlo methods with applications to energy real options," European Journal of Operational Research, Elsevier, vol. 256(1), pages 196-204.
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    4. James E. Smith, 2005. "Alternative Approaches for Solving Real-Options Problems," Decision Analysis, INFORMS, vol. 2(2), pages 89-102, June.
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