EOQ-based pricing and customer credit decisions under general supplier payments

Abstract

This study investigates an inventory model interfaced with finance, marketing, and operations in a supplier-retailer-customer chain by incorporating some relevant and essential facts. The demand pattern is a multiplicative form of the retailer's selling price and credit period. The retailer receives an upstream advance-cash-credit payment plan from the supplier while offering a downstream cash-credit payment to customers. From the retailer's perspective, offering a longer credit period to customers results in more sales volume but a higher default risk than a shorter one. The retailer's objective is to determine the optimal credit period, selling price, and replenishment time simultaneously to maximize total profit. We develop the model to fit in a general framework that includes various payment types (such as advance, cash, credit, advance-cash, advance-credit, and cash-credit) and numerous previous models as special cases. We derive explicit closed-form solutions to optimal selling price, credit period, and cycle time for five possible cases. We then establish several theoretical results and identify which case is optimal under certain conditions. The purpose of this study is to explore pricing, crediting, and lot-sizing strategies under various payment types – advance, cash, and credit. Finally, we use the analysis numerically to investigate the impact of different payment schemes on the retailer profitability.