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Top1. Introduction
Trade credit financing is as old as business and it plays a vital role in the conduct of business operations. However, the classical economic ordering quantity (EOQ) models ignore the presence of trade credit financing in inventory control decisions. They implicitly assumes that the firm must purchase its inventory on cash i.e. cash outflow equivalent to the purchase cost occurs at the time of receiving the items. However, in practice, supplier is generally willing to give credit period for paying the purchase cost of items. Usually, there is no interest charge if the outstanding amount is paid within the permissible delay in period. However, an interest is charged on the outstanding amount if the firm does not settle payment in full by the end of permissible delay period. Therefore, rational firm will delay the payment up to the last moment of credit period. The firm also has an opportunity in the sense that before the end of trade credit period, it can sell the items and accumulate revenue and will earn interest on it.
Owning to these facts, the economic replenishment problem of the firm under supplier’s trade credit financing has been studied by various researchers under variety of assumptions. In the beginning it was Beranek (1967) who brought attention to trade credit financing in making inventory decisions and gave examples where ignoring trade credit terms leads to an infeasible replenishment policy. Haley & Higgins (1973) considered the problem of jointly choosing optimal order quantity and timing of payments to the supplier when inventory is financed through trade credit. Kingsman (1983) pointed out that the two commonly used terms of payment are:(a) payment within a specified period after delivery of the order, e.g. one month; and,(b) payment by some specified time in the month following the month of delivery, e.g. by the 15th day of the month following or the end of the month following. He studied the effect of these payment rules on ordering and stockholding policies for both retail shops and manufacturing companies. Later on, Chapman, et al., (1984), Goyal (1985), Dave (1985), Daellenbach (1986), Chand & Ward (1987) and Chung (1989) developed EOQ models when supplier offers a permissible delay in payments. Carlson & Rousseau (1989) called the Kingsman’s ‘type a’ terms as ‘day- terms’ and ‘type b’ terms as ‘date-terms’ since in the former payment is due a given number of days from a reference date such as the date of invoice, shipment or receipt and in later a future date is specified on which payment is due. They examined EOQ under date-terms supplier credit, making explicit the separate effects on inventory policy of the two components of carrying cost namely, financing cost and other variable holding costs. Kingsman (1991) further extended the theory of EOQ modeling under date- terms supplier credit taking into account the analysis of Carlson & Rousseau (1989). Other articles under permissible delay in payment can be found in Carlson, et al., (1996), Luo & Huang (2002), Robb & Silver (2006), Teng, et al., (2012) and Kumar & Aggarwal (2012), and their references.