Inflation, Procurement Costs, and Working Capital: An Integrated Framework for Supply Chain Financial Planning, a Decision Model Connecting Purchasing Policies, Inventory Exposure, and Cash Requirements

Abstract

The inflation episode of 2022 exposed a gap between how firms buy materials and how they plan cash. Purchasing
teams responded to rising input prices by ordering earlier and in larger lots, while treasury teams faced sharply higher
short-term borrowing costs and growing nominal working capital needs. Purchasing quantities, inventory value and cash
needs were therefore moving together, yet they were often planned separately. Using a model-based research design
that combines an integrative synthesis of 200 sources, analytical optimisation and scenario-based numerical experiments,
this paper develops an integrated decision model that links three elements in a single framework: the purchasing policy
(order quantity, forward buying in response to announced price increases, and payment timing), the resulting inventory
exposure (the value of stock held and the price risk it carries), and the cash requirement (average and peak working
capital financed through a credit facility). The central construct is an effective carrying rate equal to physical holding cost
plus the financing rate minus expected input price inflation. We show that the optimal order quantity rises with inflation
and falls with the financing rate, that the borrowing limit acts as a binding ceiling on forward buying with a measurable
shadow price of cash, and that nominal working capital drifts upward at the rate of inflation even when physical volumes
are constant. A numerical illustration calibrated to four 2022-style macroeconomic regimes shows that an inflation-aware
policy lowers total relevant cost by up to 24 percent relative to a static policy, and that the cash constraint, not the cost
trade-off, is what limits the value of forward buying. The paper closes with a five-step planning procedure that purchasing
and finance functions can operate jointly.