Managing Production-Inventory Systems with Profit-Growth Targets

In recent economic and business environment, firms, especially startups, are interested in financial opportunities, such as capital raising and acquisition. Typically, potential investors will be attracted by firms that exhibit nice trends of profit growth, and therefore firms need to manage their operations to meet the profit target at each period (e.g., quarterly profit targets within a year). For manufacturing firms, production decisions need to be optimized accordingly. In this paper, we study the stochastic production-inventory management problem under profit-growth targets (i.e., targets on cumulative operational profit at the end of each period). We adopt a profit shortfall risk (PSR) criterion to measure the firm's risk of not meeting the targets. We then formulate the production optimization problem and analytically characterize the structure of the optimal policy. Through numerical experiments, we show how profit-growth targets can influence the firm's production decisions and analyze the impacts of three different types of targets. We also demonstrate the usefulness of our PSR model through a comparison with the benchmark model that maximizes the expected horizon-end profit