An Economic Order Quantity Model for Nonconforming Quality Products

Shib Sankar Sana

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

Abstract

The inventory literature is replete with claims on business strategy to maximize operational efficiency and customers' goodwill regarding the quality of products. A service system is composed of a number of entities, such as inventory of resources, trade credit financing, and the prediction of the demand and quality of products, among others. Drawing upon relevant research in inventory theory, in light of trade credit financing for uncertain demand of the customers, this study empirically develops a framework of an economic order quantity model for conforming and nonconforming quality products, while the nonconforming items, a random proportionate of the total products, are sold at a reduced price after a 100% screening process. In general, a trade credit policy is offered to the retailer by the supplier to buy more items. In this point of view, different delay periods with different purchasing costs are settled for the retailer. The associated expected average profit for both conforming and nonconforming products by trading off selling prices, inventory costs, interest earned from selling items, interest charged for delayed payments of purchasing cost, and shortage costs is maximized analytically. Numerical examples are illustrated to justify the model. Sensitivity analysis of the key parameters is also carried out for various issues.

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References

1999Pricing and the Newsvendor Problem: A Review with Extensions 1985Economic Order Quantity under Conditions of Permissible Delay in Payments 2000Economic production quantity model for items with imperfect quality 1955Inventory Control and Price Theory 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 2002Note on: Economic production quantity model for items with imperfect quality–a practical approach 2010A production-inventory model of imperfect quality products in a three-layer supply chain

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2016Dynamic pricing and promotion expenditures in an EOQ model of perishable products 2015EOQ model for imperfect quality items with partial backorders and screening constraint 2015Determining Replenishment Lot Size and Shipment Policy for an EPQ Inventory Model with Delivery and Rework 2017A unified presentation of inventory models under quantity discounts, trade credits and cash discounts in the supply chain management 2017

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