Simulation in Production and Logistics 2015 Markus Rabe & Uwe Clausen (eds.) Fraunhofer IRB Verlag, Stuttgart 2015 Joint Management of Material and Cash Flows Gemeinsames Management von Material und Cash Flows Enver Yücesan, INSEAD, Fontainebleau (France), enver.yucesan@insead.edu Illana Bendavid, ORT Braude College of Engineering, Karmiel (Israel), illana@tx.technion.ac.il Yale T. Herer, Israel Institute of Technology, Haifa (Israel), yale@technion.ac.il Abstract: The objective of inventory management is to design effective policies for managing the trade-off between customer satisfaction and the cost of service. Over the years, these models have become increasingly sophisticated, incorporating many complicating factors that are relevant in practice. Curiously absent from these models are the financial constraints on the working capital. In this paper, we analyse the materials management practices of a self-financing firm whose reple- nishment decisions are constrained by cash flows driven by purchases and sales. Our study shows that arbitrarily imposed constraints on the working capital not only fail to prevent any violations, but also significantly distort operational decisions. We propose less myopic policies to eliminate these distortions. 1 Introduction Working capital refers to the difference between current assets, which include cash, inventory and accounts receivable (A/R), and current liabilities, which include accounts payable (A/P) and short-term loans. The top 1000 European public companies have approximately 900 Billion Euros (9.4% of EU GDP) tied up in working capital (REL Consultancy 2012). Working capital management, whose objective is to increase the profitability of a firm by investing in long-term, high- return assets while ensuring sufficient liquidity during the operating cycle (Pass and Pike 1984), therefore represents a huge economic opportunity, not only for the economy as a whole, but for multitudes of individual firms as well. In particular, efficient working capital management is necessary to manage the inherent trade-off between profitability and liquidity since keeping too much cash for operations may lead to a smaller return from long-term investments. Against this backdrop, our investigation into the management of inventory under working capital constraints was motivated by a distributor of industrial equipment that purchases heavy goods such as generators and earthmoving equipment from a manufacturer and sells them to various customers. The distributor grants trade credit