Retailer’s optimal replenishment decisions with credit-linked demand under permissible delay in payments
TL;DR: This paper incorporates the concept of credit-linked demand and develops a new inventory model under two levels of trade credit policy to reflect the real-life situations and develops an easy-to-use algorithm to determine the optimal credit as well as replenishment policy jointly for the retailer.
About: This article is published in European Journal of Operational Research.The article was published on 2008-10-01. It has received 229 citations till now. The article focuses on the topics: Trade credit & Payment.
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TL;DR: Wang et al. as discussed by the authors adopted a systematic literature review methodology combined with bibliometric, network and content analysis based on 348 papers identified from mainstream academic databases, which provided insights not previously fully captured or evaluated by other reviews on this topic, including key authors, key journals and the prestige of the reviewed papers.
361 citations
TL;DR: An integrative review of the existing literature on trade credit motives, order quantity decisions, credit term decisions, and settlement period decisions is provided and a detailed agenda for future research in these areas is derived.
301 citations
Cites background from "Retailer’s optimal replenishment de..."
...Jaggi et al. (2008) investig ate a situation in which both the supplie r and the retailer offer trade credit....
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TL;DR: In 2007, Huang proposed the optimal retailer's replenishment decisions in the EPQ model under two levels of trade credit policy, in which the supplier offers the retailer a permissible delay period M, and the retailer in turn provides its customer a permissibledelay period N.
191 citations
TL;DR: In this article, a combination of bank and supplier financing is proposed to enable a retailer to get the best of both worlds, where the supplier can observe the actual order quantities before determining the credit terms.
Abstract: This paper has two objectives. First, we show how debt financing distorts a retailer’s inventory decision when the retailer orders multiple items that differ in cost, revenue, or demand parameters. Taking advantage of limited liability, a debt-financed retailer favors items with a low salvage value, those with a high profit margin, and those that represent a large proportion of the total inventory investment. Second, we argue that this distortion is mitigated when the financing is provided by the supplier who can observe the actual order quantities before determining the credit terms. Borrowing goods rather than borrowing cash limits the retailer’s ability to deviate from the first-best inventory decision. On the flip side, few suppliers can access capital at the same low cost as banks. We study a combination of bank and supplier financing that allows the retailer to get the best of both worlds. This paper was accepted by Serguei Netessine, operations management.
136 citations
TL;DR: In this article, the authors considered an EOQ problem under partial delayed payment, where a fraction of the purchasing cost must be paid at the beginning of the period and the remaining amount can be paid later.
Abstract: In many transactions concerning selling and buying, a specified delay of payment is offered or accepted by the seller. This can be regarded as a kind of discount and has potential consequences for the order size. These kinds of effects are not explicitly incorporated in the classical formulas for economic order quantities (EOQ). In this research we consider an EOQ problem under partial delayed payment. A fraction of the purchasing cost must be paid at the beginning of the period and the remaining amount can be paid later. Shortages are permitted and occur as a combination of backorders and lost sales. The aim of this paper is to determine the order and shortage quantities.
131 citations
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TL;DR: In this article, a mathematical model for obtaining the economic order quantity for an item for which the supplier permits a fixed delay in settling the amount owed to him is presented, and an example has been solved to illustrate the method.
Abstract: In this paper, mathematical models have been derived for obtaining the economic order quantity for an item for which the supplier permits a fixed delay in settling the amount owed to him. An example has been solved to illustrate the method.
1,204 citations
TL;DR: 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
793 citations
TL;DR: In this note, Goyal's model is amended by considering the difference between unit price and unit cost and an easy analytical closed-form solution is established, which reveals the following two managerial phenomena.
Abstract: In this note, I amend Goyal's model by considering the difference between unit price and unit cost. I then establish an easy analytical closed-form solution to the problem. The theoretical results obtained here reveal the following two managerial phenomena. (1) In certain cases, the economic replenishment interval and order quantity decreases under the permissible delay in payments, which contradicts to Goyal's conclusion. It makes economic sense for some customers to order less quantity (or shorten the replenishment time interval) and to take the benefits of the permissible delay more frequently. (2) If a supplier wants to reduce his/her large level of inventory, then he/she should charge an excessive interest rate on his/her customer's outstanding amount after the credit term expires. Consequently, his/her customers will order to buy more quantity than the classical economic order quantity. As a matter of fact, these two managerial phenomena have been demonstrated in the decision making of using credit cards. For example, most credit card companies provide card holders 25 days of grace period, and charge 18-20% interest on the amount past due (ie, the second phenomenon). However, for a well-established credit card holder, he/she will take the benefit of 25 days of grace period constantly, but will not spend over his/her limit and face an excessive finance charge (ie, the first phenomenon).
443 citations
TL;DR: It is assumed that the retailer also adopts the trade credit policy to stimulate his/her customer demand to develop the retailer's replenishment model and a theorem is developed to determine efficiently the optimal ordering policies for the retailer.
Abstract: The main purpose of this note is to modify the assumption of the trade credit policy in previously published results to reflect the real-life situations. All previously published models implicitly assumed that the supplier would offer the retailer a delay period, but the retailer would not offer the trade credit period to his/her customer. In most business transactions, this assumption is debatable. In this note, we assume that the retailer also adopts the trade credit policy to stimulate his/her customer demand to develop the retailer's replenishment model. Furthermore, we assume that the retailer's trade credit period offered by supplier M is not shorter than the customer's trade credit period offered by retailer N(M⩾N). Under these conditions, we model the retailer's inventory system as a cost minimization problem to determine the retailer's optimal ordering policies. Then a theorem is developed to determine efficiently the optimal ordering policies for the retailer. We deduce some previously published results of other researchers as special cases. Finally, numerical examples are given to illustrate the theorem obtained in this note.
429 citations
"Retailer’s optimal replenishment de..." refers background in this paper
...Recently, Huang [8] presented an inventory model assuming that the retailer also offers a credit period to his/her customer which is shorter than the credit period offered by the supplier, in order to stimulate the demand....
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TL;DR: This article deals with the problem of determining the retailer's optimal price and lot size simultaneously when the supplier permits delay in payments for an order of a product whose demand rate is represented by a constant price elasticity function.
366 citations