Ordering Policies of Deteriorating Items under Permissible Delay in Payments

TLDR: In this paper, an attempt has been made to obtain the optimum order quantity of deteriorating items under a permissible delay in payments, where it is found that the supplier allows a certain fixed period to settle the account, but beyond this period interest is charged under the terms and conditions agreed upon and moreover, interest can be earned on the revenue received during the credit period.

Abstract: In developing mathematical models in inventory control it is assumed that payment will be made to the supplier for the goods immediately after receiving the consignment. However, in practice, it is found that the supplier allows a certain fixed period to settle the account. During this fixed period no interest is charged by the supplier, but beyond this period interest is charged under the terms and conditions agreed upon and, moreover, interest can be earned on the revenue received during the credit period. In this paper an attempt has been made to obtain the optimum order quantity of deteriorating items under a permissible delay in payments. A numerical example is also given. Over the last two decades a lot of work has been published for controlling the inventory of deteriorating items. The analysis of decaying inventory problems began with Ghare and Schrader1, who developed a simple economic order quantity model with a constant rate of decay. Covert and Philip2 extended Ghare and Schrader's model and obtained an economic order quantity model for a variable rate of deterioration by assuming a two-parameter Weibull distribution. Misra3 developed the first production lot size model in which both a constant and variable rate of deterioration were considered and obtained approximate expressions for the production lot size with no backlogging. Furthermore, while developing a mathematical model in inventory control, it is assumed that the payment will be made to the suppliers for the goods immediately after receiving the consignment. However, in day-to-day dealing, it is found that a supplier allows a certain fixed period to settle the account. During this fixed period no interest is charged by the supplier, but beyond this period interest is charged by the supplier under the terms and conditions agreed upon, since inventories are usually financed through debt or equity. In case of debt financing, it is often a short-term financing. Thus, interest paid here is nothing but the cost of capital or opportunity cost. Also, short-term loans can be thought of as having been taken from the suppliers on the expiry of the credit period. However, before the account has to be settled, the customer can sell the goods and continues to accumulate revenue and earn interest instead of paying the overdraft that is necessary if the supplier requires settlement of the account after replenishment. Interest earned can be thought of as a return on investment since the money generated through revenue can be ploughed back into the business. Therefore, it makes economic sense for the customer to delay the settlement of the replenishment account up to the last day of the credit period allowed by the supplier. If the credit period is less than the cycle length, the customer continues to accumulate revenue and earn interest on it for the rest of the period in the cycle, from the stock remaining beyond the credit period. This point was not considered by Goyal4. The primary benefit of taking trade credit is that one can have savings in purchase cost and opportunity cost, which become quite relevant for deteriorating items. In such cases one has to procure more units than required in the given cycle to account for the deteriorating effect. In particular, when the unit purchase cost is high and decay is continuous, the saving due to delayed payment appears to be more significant than when the decay is continuous but