An Order Size Dependent Trade Credit Integrated Inventory Model with Capacity Constraint

Abstract

Trade credit has many forms in today’s business practice. The most common form of trade creditpolicy that is used to encourage retailers to buy largerquantities is order-size dependent. This study attempts to determine economic order quantity for deteriorating items with two-storage facilities (one is an owned warehouse and the other is a rented warehouse) where trade credit is linked to order quantity. When the number of ordered units exceeds the capacity of the own warehouse, an additional rented warehouse is required to store the excess units. Therefore, to incorporate the concept of order-size dependent trade credit and limited storage capacity, we proposed an integrated inventory model that the retailer receives an arriving lot containing some defective items with capacity constraint and a permissible delay payment period that is order-size dependent. In addition, the unit production cost, which is a function of the production rate, is considered. Our objective is to determine the retailer’s optimal order cycle length, the order quantity, and the optimal number of shipments per production runs from the supplier to the retailer so that the entire supply system has maximum profit. Finally, numerical examples are presented to illustrate the solution procedure.