A discounted cash flow approach to the base stock inventory model

A widespread approach to inventory modelling is to associate costs with measures of system performance and determine the control policy which minimises the long run average cost per unit time. This type of approach ignores the impact of a control policy on the timing of the cash flows associated wit...

Full description

Saved in:
Bibliographic Details
Published in:International journal of production economics 2005-01, Vol.93-94 (1), p.439-445
Main Authors: Hill, R.M., Pakkala, T.P.M.
Format: Article
Language:English
Subjects:
Base stock
Cash flow
Compound interest
Discounted cash flow
Industrial economics
Inventory
Inventory control
Net present value
Poisson process
Studies
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:A widespread approach to inventory modelling is to associate costs with measures of system performance and determine the control policy which minimises the long run average cost per unit time. This type of approach ignores the impact of a control policy on the timing of the cash flows associated with payments to suppliers and revenue streams from customers. The approach in this paper is to concentrate on cash flows and determine the control policy which maximises the expected net present value of the cash flows associated with a demand, valued at the time when that demand occurs. There is a Poisson demand process, a fixed lead time, unsatisfied demand is backordered and the system is controlled using a base stock policy. A solution procedure is given and a comparison is made with an equivalent simple interest model and with the standard cost model with linear holding and shortage costs.
ISSN:0925-5273
1873-7579
DOI:10.1016/j.ijpe.2004.06.040