Research on Retailer's Ordering Decision under bank financing

Abstract

For small and medium-sized retailer, the optimal-ordering policy is often limited by its cash flow. On one hand, many research assume that retailers have enough cash to obtain the optimal-order quantity; on the other hand, research that considers the retailer's capital constraint usually assumes the market demand is certain. In this paper, we study the two-period optimal ordering decisions of the retailer who has cash flow concern under stochastic market demand. Based on the newsvendor model, we solve the problem backward from the second period to the first period to maximize the retailer's cash level on hand in the second period, and then discuss the relationship between the optimal ordering and the initial capital level. We show that the retailer's optimal inventory level increases by the initial capital level. And the retailer's ordering policy is decided not only by his initial cash level, but also by the profit margin of the product. For smaller profit margin, the structure of the retailer's optimal order policy can be characterized by five intervals of the initial cash level; but for a larger profit margin, the optimal order policy can be characterized by three intervals.