Inventory and Credit Decisions Under Inflationary Conditions With Inflation Induced Bad-Debts

Abstract

This article describes how a credit period, through its influence on demand, becomes a determinant of inventory decisions; therefore, inventory decisions should be determined jointly with credit decisions. Inflation and time value of money affects valuation of investments; hence their effect should not be disregarded in decision-making. Selling on credit exposes a firm to an additional dimension of default risk from customers as a result of inflation. Consequently, this article presents a mathematical model for the joint determination of optimal inventory and credit decisions for a day-terms credit-linked demand by incorporating the effects of inflation and the time value of money. It is assumed that an increase in the rate of inflation leads to an increase in bad-debts. The objective of the model is to maximize the present value of a firm's net profit per unit of time by jointly optimizing the day-terms credit period and order interval. A numerical example, sensitivity analysis, and observations are presented to illustrate the effectiveness of the proposed model.