Impacts of inspection errors and trade credits on the economic order quantity model for items with imperfect quality

Abstract

It is common for a retailer to receive some imperfect quality items in a lot. An imperfect inspection process may lead to misclassification errors. Inspection errors due to human fallibility, flawed inspection techniques, or environmental factors can occur, incurring additional costs. In addition, a supplier may provide a permissible delay in payments to stimulate demand from the retailer. In this paper, we develop an economic order quantity (EOQ) model that takes into account these phenomena (i.e., permissible delays in payments, defective items, and inspection errors) in determining the optimal ordering policy that maximises a retailer's total profit. Four theorems are provided to find the retailer's optimal ordering policy. Finally, numerical examples are given to illustrate each of these theorems and sensitivity analysis is performed to obtain managerial insights.