Joint Inventory and Cash Management for Multidivisional Supply Chains

Abstract

This paper develops a centralized supply chain model that integrates material flows with cash flows. The supply chain is owned by a single firm with two divisions. The downstream division (headquarters), facing random customer demand, replenishes materials from the upstream division. The firm installs a financial services platform that pools the divisions' cash into a master account managed by the headquarters. In each period, cash is received from customers and paid to the outside vendor after materials are delivered. The headquarters determines how much cash to retain for inventory replenishment. The objective is to determine an optimal joint inventory replenishment and cash retention policy for the entire supply chain. We prove that the optimal policy has a surprisingly simple structure-both divisions implement a base-stock policy for inventory replenishment; the headquarters monitors the corporate working capital and implements a two-threshold policy for cash retention. This result is obtained by extending the well-known Clark-Scarf decomposition with newly derived cash-related penalty functions. The optimal policy enables us to investigate the interaction between cash and inventory decisions. We show that in the presence of transaction costs, a firm may stock more even if the inventory holding cost increases. To quantify the value of financial integration, we compare the cash pooling model with systems under different levels of financial integration. Our study suggests that the value of cash pooling can be significant when demand is increasing (respectively, stationary) and the internal transfer price is low (respectively, high). Nevertheless, a significant amount of cash pooling benefit may be recovered if the headquarters can optimize the internal transfer price.

Two-stage inventory management with financing under demand updates

“… Bendavid et al (2017) presented a heuristic algorithm for a working capital constrained firm to find the optimal order level when lead times and delays in payments are non-zero. Luo and Shang (2015) investigated the centralized multi-echelon supply chain inventory policies by adding cash penalty functions and they prove that base-stock policy can be optimal.…”

Research on Trade Credit and Bank Credit Based on Dynamic Inventory

“…As an integral part of the supply contract, trade credit and inventory management are inextricably linked. Luo, Wei and Shang [21] show that in the presence of transaction costs, a firm may stock more even if the inventory holding cost increases. Yang et al [22] demonstrate how trade credit enhances supply chain efficiency by allowing the retailer to partially share the demand risk with the supplier by transfer stock.…”

A Multiproduct Single‐Period Inventory Management Problem under Variable Possibility Distributions

“…Constraint (20) represents the fact that the investment amount on total production cost has an upper limit on the maximum investment. Constraints (21) and (22) ensure that decision variables ( = 1, 2, . .…”

“…Under interval demand uncertainty, Solyali et al [19] proposed a new robust formulation which could solve the intractability issue for large problem instances. As for recent development in stochastic inventory management problems, the interested reader may further refer to [20][21][22][23][24].…”