Loans, ordering and shortage costs in start-ups: a dynamic stochastic decision approach

Abstract

Start-up companies are a vital ingredient in the success of a globalised networked world economy. We believe such companies are interested in maximising the chance of surviving in the long-term. We present a markov decision model to analyse survival probabilities of start-up manufacturing companies. Our model examines the implications of their operating decisions. In particular, it examines their inventory strategy including purchasing, shortage and ordering costs, as well as the influence of loans on the firm. It is shown that although the start-up company should be more conservative in its component purchasing strategy than if it were a well established company it should not be too conservative. Nor is its strategy monotone in the amount of capital available.

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