Optimal strategy for a manufacturer-retailer inventory system with defective items under retailer partial trade credit policy

Abstract

In order to reduce default-risk, a retailer in practice frequently requests its credit risk customers to pay a part of the purchase amount as collateral deposit at the time of ordering, and then offers a trade credit for the outstanding balance (partial down-stream trade credit). In contrast, the retailer usually receives a full trade credit on the purchase amount from the manufacturer (up-stream full trade credit). The present study develops a single manufacturer single retailer integrated supply chain model under two-level trade credit in which the retailer receives a full trade credit from the manufacturer but offers a partial trade credit to its customers. The manufacturer delivers the retailer’s order quantity in a number of equal shipments. An arriving lot from the manufacturer contains a certain proportion of defective items. The market demand rate is sensitive to the length of the customer’s trade credit period which is offered by the retailer. The present study aims to determine the optimal replenishment cycle time, the order quantity and the number of lots from the manufacturer to the retailer such that the total profit of the integrated supply chain system is maximized. Solution algorithms are designed to find the optimal solution of the model. The theoretical results developed in the paper are illustrated through a numerical example. Sensitivity analysis of some important parameters is presented to study their influence on the optimal solution.