Coordinated credit policy and inventory control for a single vendor and a single buyer

Abstract

A vendor often provides credit terms involving trade credit and cash discounts to stimulate the demand and to incite the buyer to pay earlier. The credit terms affect the vendor's and the buyer's inventory and pricing policies. This study investigates a situation where the vendor offers the buyer a cash discount scheme that is related to the length of deferred payment period, and the buyer must settle the account at the end of specified credit period. The buyer would pass portions of saving from cash discounts to his customers, and the customers' demand is sensitive to the buyer's retail price. An integrated inventory model is proposed to determine lot sizes and the payment period so that the joint total profit is maximized. A stairstep cash-discount function is applied to the general model to illustrate the application of the model.