Two-level uncapacitated lot-sizing problem considering the financing cost of working capital requirement

Abstract

During financial crisis, companies constantly need free cash flows to efficiently react to any uncertainty, thus ensuring solvency. Working capital requirement (WCR) has been recognized as a key factor for releasing tied up cash in companies. However, in literatures related to lot-sizing problem, WCR has only been studied in the single-level supply chain context. In this paper, we initially adopt WCR model for a multi-level case. A two-level (supplier–customer) model is established on the basis of the classic multi-level lot-sizing model integrated with WCR financing cost. To tackle this problem, we propose sequential and centralized approaches to solve the two-level case with a serial chain structure. The ZIO (Zero Inventory Ordering) property is further confirmed valid in both cases. This property allows us to establish a dynamic programming-based algorithm, which solves the problem in O(T⁴). Finally, numerical tests show differences in optimal plans obtained by both approaches and the influence of varying delays in payment on the WCR of both actors.

Keywords

two-level ULS problem / lot-sizing / working capital requirement / ZIO property / infinite production capacity

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