Impacts of expiration date on optimal ordering policy for deteriorating items under two-level trade credit: Quantity loss and quality loss

Abstract

Practically, two-level trade credit is usually applied to stimulate the retailer’s order incentive for deteriorating items with expiration date. Nevertheless, previous studies ignore to identify both quantity loss and quality loss derived from expiration date, and lack of examining whether these joint losses impact effectiveness of two-level trade credit. Thus, this paper firstly builds an inventory model for deteriorating items with expiration date, which accurately determines the retailer’s optimal response when involving both quantity and quality losses. (1) For given expiration date, this paper identifies the phenomenon of limit effect and its occurred conditions, referring that the retailer’s optimal order cycle for deteriorating items equals its expiration date; (2) this paper validates the scope of limit effect, below which deteriorating items should be optimally replenished with its expiration date. In addition, two-level trade credit is further incorporated into deteriorating items, resulting in two types of expiration date scenarios including lower and higher. Specifically, for the given expiration date, upstream credit period can affect the retailer’s selection of operational policies, and the occurrence of limit effect. And along with the increase of expiration date, more operational policies can be assumed by the retailer.