Effects of overtime and trade credit on an integrated inventory model with limited production capacity

Abstract

In production and operation activities, some enterprises’ capacity can not make up for market demand. To meet customer needs, overtime is one of the most common measures taken by enterprises. In this restricted situation, a combination strategy of overtime and subcontracting is introduced to improve the production. When orders occur, the vendor offers a credit time to the buyer, and it is assumed that daily demand is an exponential function of credit time. In this paper, a two-echelon supply chain with overtime and subcontracting under a trade credit policy is studied when limited production capacity exists. The main objective of this paper is to determine the buyer’s optimal ordering quantity and the vendor’s optimal overtime and subcontracting strategies with an optimal credit period, which minimize the costs of an independent decision model and an integrated model, respectively. Adequate numerical examples and sensitivity analysis are presented to demonstrate the applicability of the proposed framework. The conclusions show that inefficient overtime satisfies low demand under limited production capacity and that the vendor turns to subcontractors when demand grows.