Keep or return? Managing ordering and return policies in start-up companies

Possani, Edgar, Thomas, Lyn C. and Archibald, Thomas W. (2007) Keep or return? Managing ordering and return policies in start-up companies. European Journal of Operational Research, 179 (1), 97-113. (doi:10.1016/j.ejor.2006.01.044).

Abstract

Start-up companies are considered an important factor in the success of a nation’s economy. We are interested in the decisions for long-term survival of these firms when they have considerable cash restrictions. In this paper we analyse several inventory control models to manage inventory purchasing and return policies. The Markov decision models are formulated for both established companies that look at maximising average profit and start-up companies that look at maximising their long-term survival probability.
We contrast both objectives, and present properties of the policies and the survival probabilities. We find that start-up companies may need to be riskier if the return price is very low, but there is a period where a start-up firm becomes more cautious than an established company and there is a point, as it accumulates capital, where it starts behaving as an established firm. We compare the various models and give conditions under which their policies are equivalent.

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