| Abstract: | Working capital management involves the balancing of activities from three functional areas that are generally considered to be somewhat separable—marketing, production, and finance. Proper integration of the various parts of the working capital process requires simultaneous consideration of both cross-sectional interrelationships among the functional activities and intertemporal dynamics of the linkages between elements of the problem that are either out of phase with each other or have differing short-and long-run ramifications. This suggests that a formal modeling approach can be advantageously employed. Two modeling methodologies, simulation and optimization, are usually offered as mutually exclusive alternatives for this application, but both have serious shortcomings when used in this kind of planning context. In real-world applications, simulation trends to be employed for more often than optimization because model comprehensibility and computational feasibility difficulties have severely restricted the ability of optimization models to address large, complex, but realistic problems. However, many of the shortcomings of optimization approaches are caused by technical problems, while simulation models suffer from several conceptual inadequacies. In this article we describe an optimization modeling procedure that is capable of eliminating many of the technical difficulties and suggest how it can be employed alongside a simulation model in such a way that the two approaches are mutually reinforcing and overcome most of the conceptual problems associated with either technique when used alone. |
