Optimal trade credit and order quantity when trade credit impacts on both demand rate and default risk

K. R. Lou · W-C Wang

68 citations0/0 files storedJournal of the Operational Research Society

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Supply Chain and Inventory Management Sustainable Supply Chain Management Working Capital and Financial Performance

Abstract

In practice, to attract new buyers and to avoid lasting price competition, a seller frequently offers its buyers a permissible delay in payment (ie, trade credit). However, the policy of granting a permissible delay in payment adds an additional dimension of default risk to the seller. In contrast to previous researchers for finding optimal solutions to buyers, we first propose an economic order quantity model from the seller's prospective to determine its optimal trade credit and order quantity simultaneously. In addition, we incorporate the important and relevant fact that trade credit has a positive impact on demand rate but a negative impact on receiving the buyer's debt obligations. Then the necessary and sufficient conditions to obtain the seller's optimal trade credit and order quantity are derived. An algorithm to determine the seller's optimal trade credit is also proposed. Finally, we use some numerical examples to illustrate the theoretical results and to provide some managerial insights.

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References

1985Economic Order Quantity under Conditions of Permissible Delay in Payments 1995Ordering Policies of Deteriorating Items under Permissible Delay in Payments 1997An ordering policy for deteriorating items with allowable shortage and permissible delay in payment 2002On the economic order quantity under conditions of permissible delay in payments 2003Optimal retailer's ordering policies in the EOQ model under trade credit financing 1997Retailer's pricing and lot sizing policy for exponentially deteriorating products under the condition of permissible delay in payments 2000An inventory model with deteriorating items under inflation when a delay in payment is permissible 2003An EOQ model for deteriorating items under supplier credits linked to ordering quantity

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2017A retailer-supplier supply chain model with trade credit default risk in a supplier-Stackelberg game 2015Sustainable Trade Credit and Replenishment Policies under the Cap-And-Trade and Carbon Tax Regulations 2020Effect of price-sensitive demand and default risk on optimal credit period and cycle time for a deteriorating inventory model 2018Supply chain coordination with trade credit under the CVaR criterion

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