Managing inventory and production capacity in start-up firms

Abstract

Successful start-up firms make a valuable contribution to economic growth and development.
Models that provide insight into the management of start-up firms are therefore important. We consider the problem of managing inventory and production capacity in a start-up manufacturing firm and argue that for such firms the objective of maximising the probability of the firm surviving is more appropriate than 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 ramp-up; stochastic modelling; dynamic programming

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