Inventory Control Under Financial Turbulence

In global supply chains, both the operational costs and discount factors of a firm can be strongly affected by unpredictable national and international economic forces. In this chapter, we investigate the impact of these financial uncertainties on inventory decisions by modeling the operational costs, discount factors, and demands as stochastic processes that evolve as financial uncertainties are realized over time. To illustrate the benefits of incorporating stochastic discount factors, we conduct a case study of four types of Mexican firms who conduct sizeable business with the U.S.With a discount factor model fitted to data, we conduct a numerical study and show that both the business type and the stockout protocol strongly affect the optimal inventory decisions, and that the cost penalty for ignoring the dynamic nature of the financial environment can exceed 36%.