Retailer’s optimal ordering policy under supplier credits

Abstract.

In the traditional inventory economic order quantity (or EOQ) model, it was assumed that the customer must pay for the items as soon as the items are received. However, in practices, the supplier frequently offers a cash discount and/or a permissible delay to the customer especially when the economy turns sour. As a result, in this paper, we establish an optimal ordering policy for a retailer when the supplier provides not only a cash discount to avoid the default risk but also a permissible delay to increase sales. We then characterize the optimal solution and provide an easy-to-use algorithm to find the optimal order quantity and replenishment time. Furthermore, we also compare the optimal order quantity under supplier credits to the classical economic order quantity. Finally, several numerical examples are given to illustrate the theoretical results and make the sensitivity of parameters on the optimal solution.