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Managing inventory and production capacity in start-up firms

Managing inventory and production capacity in start-up firms
Managing inventory and production capacity in start-up firms
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
CORMSIS-05-03
University of Southampton
Archibald, Thomas W.
7b19237f-0d39-4979-88c5-5c40090991ee
Possani, Edgar
a811956e-a248-4996-b2a1-5290148e3868
Thomas, Lyn C.
a3ce3068-328b-4bce-889f-965b0b9d2362
Archibald, Thomas W.
7b19237f-0d39-4979-88c5-5c40090991ee
Possani, Edgar
a811956e-a248-4996-b2a1-5290148e3868
Thomas, Lyn C.
a3ce3068-328b-4bce-889f-965b0b9d2362

Archibald, Thomas W., Possani, Edgar and Thomas, Lyn C. (2005) Managing inventory and production capacity in start-up firms (Discussion Papers in Centre for Operational Research, Management Science and Information Systems, CORMSIS-05-03) Southampton, UK. University of Southampton 20pp.

Record type: Monograph (Discussion Paper)

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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Published date: 2005

Identifiers

Local EPrints ID: 71392
URI: https://eprints.soton.ac.uk/id/eprint/71392
PURE UUID: e3c79c5c-a5a5-4db9-bd41-70dd63a344d1

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Date deposited: 10 Feb 2010
Last modified: 19 Jul 2017 00:00

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