Integrating Inventory-Based Financing in Production Planning Decisions

In this article, we study a multiproduct multiperiod production planning problem faced by a cash-strapped manufacturer, who utilizes inventory-based financing (IBF) to capture additional demand during peak season, which otherwise will not be met due to cash shortage. Each product has a unique selling season and its production incurs a significant setup cost. We formulate the problem as an integer program and show the special case with one product is NP-hard. By exploiting the inherent structure of three distinct but related decisions, i.e., the production, financing, and working capital allocation decisions, we develop a Lagrangian relaxation-based branch-and-bound procedure to solve the model. Through a series of numerical experiments using real data, this article presents managerial insights into how the manufacturer's optimal production plan could differ with and without IBF. In an optimal plan, we show the profit maximizing strategy for the cash-strapped manufacturer is to overstock and pledge inventories to secure more loans prior to peak demand periods.