Optimal ordering policy for a retailer with consideration of customer credit under two-level trade credit financing

Abstract

In practice, to promote sales and alleviate the default risk of customers, the retailer frequently offers its good credit customers full trade credit while offers bad credit customers partial trade credit. In other words, both types of customers receive a credit period simultaneously, but the bad credit customers must pay a fraction of the purchase cost at the time of buying productions as a collateral deposit. By contrast, for the sake of self-interest, the supplier chooses to provide the partial trade credit for its retailer on account of reducing the credit risk. Numerous researchers assume that the retailer has the powerful decision-making right and he/she can obtain the full trade credit, however, very few academicians have studied that the supplier offers the retailer partial trade credit, which is more realistic and significant. In this paper, we establish an economic order quantity model for a retailer who receives a partial trade credit by its supplier, and offers a full or partial trade credit to its good or bad credit customers respectively based on the cost minimization of the retailer. Then, the optimal ordering strategy of the retailer under different conditions is given. Finally, through numerical examples and sensitivity analysis, we derive the influence of related parameters on retailer’s order decision and managerial insights.