Optimal Inventory and Credit Policies under Two Levels of Trade Credit Financing in an Inventory System with Date-Terms Credit Linked Demand

Abstract

Credit policy through its influence on demand indirectly affects the inventory policy which is designed to meet that demand; therefore inventory policy is interrelated with the credit policy. Consequently, they must be coordinated and should be determined simultaneously in a systems perspective. In this paper, a mathematical model is developed in a discounted cash flow (DCF) framework to jointly determine inventory and credit policies under two levels of trade credit financing in the presence of stimulating as well as disintegrating effect of credit period on demand. The objective of the model is to maximize the present value of firm's net profit per unit time by jointly optimizing the date-terms credit period and replenishment interval. Numerical example and sensitivity analysis are presented to illustrate the effectiveness of the proposed model and results are discussed.