Lama Moussawi-Haidar

Coordinating a three-level supply chain with delay in payments and a discounted interest rate

Both researchers and practitioners recognize the importance of the interactions between financial and inventory decisions in the development of cost effective supply chains. Moreover, achieving effective coordination among the supply chain players has become a pertinent research issue. This paper considers a three-level supply chain, consisting of a capital-constrained supplier, a retailer, and a financial intermediary (bank), coordinating their decisions to minimize the total supply chain costs. Specifically, we consider a retailer managing its cash through the suppliers bank, in return for permissible delay in payments from the supplier. The bank, benefiting from increasing its cash holdings with the retailers cash deposits, offers the supplier a discount on its borrowing rate. We show that the proposed coordination mechanism achieves significant cost reduction, by up to 26.2%, when compared to the non-coordinated model. We also find that, with coordination, the retailer orders in larger quantities than its economic order quantity, and that a higher return on cash for the retailer leads to a higher order quantity. Furthermore, we empirically validate our proposed coordination mechanism, by showing that banks, retailers, and suppliers have much to gain through collaboration. Thus, using COMPUSTAT datasets for the years 1950 through 2012, we determine the most important factors that affect the behavior of the retailers and suppliers in granting and receiving trade credit. Our results indicate that engaging into such a coordination mechanism is a win-win situation to all parties involved.

A joint model for cash and inventory management for a retailer under delay in payments

As retail companies continue to navigate through the economy downturn, it becomes critical to find innovative cost reduction methods. Cash management is a cost-intensive process for retailers, who are currently focusing on effective cash management, such as deciding on the maximum cash level to keep in their business accounts and how much to borrow to finance inventories and pay suppliers. In this paper, we consider the problem of finding the optimal operational (how much to order and when to pay the supplier) and financial decisions (maximum cash level and loan amount) by integrating the cash management and inventory lot sizing problems. We consider a supplier offering a retailer an interest-free credit period for settling the payment. Beyond this period, the supplier charges interest on the outstanding balance. Whenever the cash exceeds a certain limit, it will be invested in purchasing financial securities. At the time when the retailer pays the supplier for the received order, cash is withdrawn from the account, incuring various financial costs. If the cash level becomes zero or not sufficient, the retailer obtains an asset-based loan at interest. We model this problem as a nonlinear program and propose a solution procedure for finding the optimal solution. We perform a numerical study to analyze the impact of optimal cash management on the inventory decisions. The results indicate that the optimal order quantity decreases as the retailers return on cash increases. We compare our model to a model that ignores financial considerations of cash management, and show numerically that our model lowers the retailers cost. Also, we illustrate the effect of changing various model parameters on the optimal solution and obtain managerial insights.

Transshipment and safety stock under stochastic supply interruption in a production system

We consider a two-echelon system with one source supplying two locations with the same product. The random occurrence of interruptions at the source where downtime is also stochastic can result in stockouts at the two receiving locations. Our model studies the benefit of allowing each location to carry a safety stock where holding costs can be different at each location. The objective is to reduce overall cost at both locations. In some cases it is optimal to allow for a transshipment of inventory from the safety stock of one location to the other. We jointly solve for the optimal safety stock at each location and the optimal amount to be transshipped from a location to the other. We show that by conditioning on the transshipment direction the total cost becomes convex as a function of the safety stock levels at the receiving locations and the amount to be transshipped from a location to the other. Numerical examples are presented for different system cost parameters and probability distributions.

Inventory control with an order-time constraint: optimality, uniqueness and significance

This paper analyzes a stochastic inventory problem with an order-time constraint that restricts the times at which a manufacturer places new orders to a supplier. This constraint stems from the limited upstream capacity in a supply chain, such as production capacity at a supplier or transportation capacity between a supplier and a manufacturer. Consideration of limited upstream capacity extends the classical inventory literature that unrealistically assumes infinite supplier/transporter capacity. But this consideration increases the complexity of the problem. We study the constraint under a Poisson demand process and allow for a fixed ordering cost. In presence of the constraint, we establish the optimality of an (s,S) policy under both the discounted and average cost objectives. Under the average cost objective, we show the uniqueness of the order-up-to level S. We numerically compare our model with the classical unconstrained model. We report significant savings in costs that can be achieved by using our model when the order time is constrained.

Economic production quantity with maintenance interruptions under random and correlated yields

Abstract This paper considers an economic production quantity with imperfect items where the quality of items produced within the same production run is correlated. Production and scheduled maintenance policies for a correlated binomial production system are investigated. We study the impact of correlation on the system performance measures and draw insights in terms of the effect of correlation on the production and maintenance policies. We also illustrate that the popular and commonly used interrupted geometric production systems can be analysed by an equivalent correlated binomial production model.

Integrating the economic production model with deteriorating raw material over multi-production cycles

This paper considers an Economic Production Quantity (EPQ) model with deteriorating raw material and investigates the impact of deterioration on the production process. The EPQ base case with no deterioration is presented where raw material is ordered for multiple production cycles. We present the differential equations to calculate the on-hand inventory of raw material and present closed-forms expressions for the required order of raw material to result in a desired amount of effective raw material per order cycle. Closed-form expression for the total profit per unit time is obtained and we solve for the optimal production quantity of finished product per production cycle and the order quantity of raw material. We present numerical examples where we compare our model to a system which ignores the impact of deterioration and results in shorter production cycles due to an insufficient amount of effective raw material.

Percentage Rent Contracts between Co-Stores

High rental rates and space scarcity in popular retail areas are encouraging retailers to share available space, creating co-stores. Co-stores with complementary products enjoy a boost in foot traffic, thus higher sales. When the space is owned by one, a common practice for retailers is to engage in a revenue sharing agreement. We study the optimal design of a percentage rent contract between two co-stores, each having his/her own random sales, dependent on effort levels of both retailers. Since the effort level exerted by a retailer is often unverifiable, it results in a double moral hazard problem. We show that a linear percentage rent, which is composed of a sales share and a based rent, achieves the second-best effort levels. The landlord may also find it optimal to set a fixed rent by setting the sales share to zero. With Cobb-Douglas sales and power disutility of effort functions, we obtain closed-form expressions for the optimal contract. We show that the landlord charges a high sales share for a tenant with low demand externality and a high sales scale. The landlord is better off renting out space to a small but high revenue generating retailer, rather than one generating larger traffic, but with lower sales scale. When the landlord’s externality potential is low, but he is successful in generating sales, optimal sales share is low, but the base rent is high. The percentage rent can increase the landlord’ profit by up to 13% compared to the conventional fixed rent.