The operations-finance interface: An example from lot sizing

Operational models are typically used to optimize operational measures such as lead time, work-in-process or throughput. Unfortunately, these models often do not take into account the financial aspects of the decisions made. Financial models on the other hand try to optimize costs, profits or shareholder's value. Integration with the underlying operational model is however often missing because the operational decisions are considered to be the input for the financial model. Integrated models are of interest because the outcome of pure operational models can become suboptimal or even infeasible when considering the financial implications while financial models overlook operational issues like capacity, utilization and congestion. We build an integrated operational-financial model that optimizes shareholder value taking into account the relevant financial and operational parameters and constraints. We choose to maximize economic value added, which is a flow measure and therefore well suited for our model which runs over the period of one year.