Managing Inventory and Production Capacity in Start-Up Firms

28 Pages Posted: 18 Dec 2009

See all articles by Lyn C. Thomas

Lyn C. Thomas

University of Southampton - School of Management

Thomas W. Archibald

Business School, University of Edinburgh

Edgar Possani

Instituto Tecnológico Autónomo de México (ITAM)

Date Written: December 15, 2009

Abstract

We consider the problem of managing inventory and production capacity in a start-up manufacturing firm with the objective of maximising the probability of the firm surviving as well as the more common objective of maximising profit. Using Markov decision process models, we characterise and compare the form of optimal policies under the two objectives. This analysis shows the importance of coordination in the management of inventory and production capacity. The analysis also reveals that a start-up firm seeking to maximise its chance of survival will often choose to keep production capacity significantly below the profit maximising level for a considerable time. This insight helps us to explain the seemingly cautious policies adopted by a real start-up manufacturing firm.

Keywords: start-up firms, inventory, production capacity, stochastic modelling, dynamic

JEL Classification: C61, L21, L22, M11

Suggested Citation

Thomas, Lyn C. and Archibald, Thomas W. and Possani, Edgar, Managing Inventory and Production Capacity in Start-Up Firms (December 15, 2009). Available at SSRN: https://ssrn.com/abstract=1524005 or http://dx.doi.org/10.2139/ssrn.1524005

Lyn C. Thomas

University of Southampton - School of Management ( email )

Highfield
Southampton S017 1BJ, Hampshire SO17 1BJ
United Kingdom
(023) 8059 7718 (Phone)
(023) 8059 3844 (Fax)

Thomas W. Archibald

Business School, University of Edinburgh ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
UNITED KINGDOM

Edgar Possani (Contact Author)

Instituto Tecnológico Autónomo de México (ITAM) ( email )

Rio Hondo No. 1
Progreso Tizapan
Mexico City, D.F., 01080
Mexico
52 55 56284000 (Phone)

HOME PAGE: http://www.matematicas.itam.mx/

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