Loans, ordering and shortage costs in start-ups: a dynamic stochastic decision approach

Start-up companies are a vital ingredient in the success of a globalised networked world economy. We believe that such companies are interested in maximising the chance of surviving in the long term. We present a Markov decision model to analyse survival probabilities of start-up manufacturing companies. Our model examines the implications of their operating decisions, in particular how their inventory strategy is influenced by purchasing, shortage, transportation and ordering costs, as well as loans to the firm. It is shown that although the start-up company should be more conservative in its component purchasing strategy than if it were a well-established company it should not be too conservative. Nor is its strategy monotone in the amount of capital available.