Optimizing order policy and credit term for items with inventory-level-dependent demand under trade credit limit

Abstract

Under the combined effects of inventory-level-dependent demand (ILDD) and trade credit, the retailer is able to order more quantities to stimulate market demand. However, from the supplier's perspective, two important issues are lacking sufficient attention. First, during the credit period, the retailer's higher order quantities imply increases in both the retailer's account payable and the supplier's opportunity cost of capital. Second, given the supplier's fixed production rate, the increased market demand may drive the capacity utilization to be variable. Thus, by formulating a supplier-dominated system, this paper incorporates trade credit limit (TCL) to address its effects on optimal policies vis-à-vis the item with ILDD. Specifically, three indicators can be proposed to reveal which type of financing policy the retailer should choose. Moreover, based on TCL, the supplier can effectively manage the retailer's order quantity and the corresponding account payable. Additionally, the retailer's maximum allowable order quantity is developed to ensure that the supplier can supply the retailer's order quantity on time. Furthermore, when the effects of ILDD become more significant, the manufacturer will reduce the maximum allowable order quantity to control the retailer's order incentive.

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