Retailer’s Ordering Policy in a Supply Chain when Demand is Price and Credit Period Dependent

Retailer’s Ordering Policy in a Supply Chain when Demand is Price and Credit Period Dependent

Chandra K. Jaggi (University of Delhi, India) and Amrina Kausar (University of Delhi, India)
Copyright: © 2013 |Pages: 16
DOI: 10.4018/978-1-4666-2473-3.ch014
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Abstract

Trade credit is a well established promotional tool in the present competitive world and its impact on demand cannot be ignored. Businesses often use trade credit to increase their market share and, in turn, the profit. Undoubtedly, trade credit plays a great role in increasing the demand but it also involves a great risk of non-payment. In order to reduce the risk of non-payment, businessman at times use a partial trade credit policy in which they demand a certain percentage of the total amount from the customer at the time of purchase and offers the credit for the remaining amount. Furthermore, it is also observed that the demand of FMCG is highly price sensitive. In order to see the effect of credit and price together, on demand, the retailer’s demand is taken as a function of price and credit period. Moreover it is assumed that the supplier offers the full credit to the retailer but the retailer passes a partial credit to customers. The inventory model, determines the optimal replenishment time, credit period, and price for the retailer that maximizes profit. Numerical examples have been provided to support the model followed by the comprehensive sensitivity analysis.
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Introduction

In today’s competitive business environment, trade credit plays an important role in capturing maximum market share. Supplier offers trade credit to the retailers to encourage selling, promote market share, and reduce on hand inventory stock levels. On the other hand, retailer gains capital, materials and services without any payment during the credit period. Hence both the retailer and the supplier can take advantage of the trade credit policy. As evidence by previous literature including Peterson and Rajan (1997), Nilsen (2002), Fisman and Love (2003), Love et al. (2007), and Ge and Qiu (2007) trade credit is important source of finance for the retailers. The impact of trade credit policy on EOQ was first developed by Goyal (1985). Aggarwal and Jaggi (1995) generalized Goyal’s (1985) model by extending it for exponentially deteriorating items. More related work can be found in Shinn (1997), Chung (1998), Sarker et al. (2000), Arcelus (2001), Teng (2002), Salameh et al. (2003), Teng et al. (2006), Song and Cai (2006), Jaber (2007), and Sana and Chaudhuri (2008).

In all the mentioned models it was assumed that the supplier would offer the trade credit to the retailer but the retailer does not extend this same to his customers. This is termed as one level of trade credit. But, in most business transactions, this assumption is unrealistic. As it is observed that sometimes the retailer tend to also extend this benefit to his customers by offering a delayed payment period, known as two level trade credit. Huang (2003) and Biskup et al. (2003) developed the retailer’s optimal ordering policy under a two-level trade credit policy in which the retailer receives a favorable delayed payment period from the supplier and subsequently provides a delayed payment period to customers. Later, Huang (2006) modified Huang (2003) to incorporate a retailer’s storage space limitation into the model. Huang (2007) extended Huang (2003) to an economic production quantity (EPQ) model with two-level trade credit. In all of the abovementioned articles, it is assumed that the trade credit period offered by the supplier is longer than the trade credit period offered by the retailer. Teng and Goyal (2007) released this assumption and established an EOQ model with two-level trade credit. Chung and Huang (2007) continued to amend Huang (2006) to propose an EOQ model for deteriorating items under the two-level trade credit policy. Liao (2008) developed an EOQ model for exponentially deteriorating items under the two-level trade credit policy. In contrast, Teng and Chang (2009) modified Huang (2007) and developed an EPQ model. Jaggi et al. (2008) developed an EOQ model under a two-level trade credit policy with credit-linked demand. Thangam (2009) extends Jaggi (2008) model for perishable items when demand depends on both selling price and credit period.

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