Optimizing retailer prepayment installment in inventory systems with link-to-order discounts and power demand patterns of price and time: An effective decision support framework

Abstract

Installment in the prepayment mechanism has emerged as a significant decision for many companies due to rising capital costs and increasing pressures from suppliers for various products. To motivate the companies about the prepayment mechanism, suppliers allow the frequency of installment of advance payment as a decision variable for the company and the per unit acquisition cost as a step-down function in exchange for an order-based prepayment regulation allowing the stepwise decreasing prepayment portion and duration as well. This paper investigates the optimal joint decision-making of a company’s prepayment, pricing, and stocking policies to maximize profits in the context of an order-based prepayment and discount regulation. A realistic approach is adopted in the study by considering the clients’ demand as a multiplicatively separable power function that accounts for both the price and the storage time of products. Theoretical expressions are derived to check when multiple or single installments are more profitable for the company. To achieve the maximum profit, a solution approach is introduced based on all the derived theoretical outcomes. The results of three numerical studies are documented and then the effects of order-based prepayment and discount regulation on optimal policies and maximum profit are further studied. The results of the study indicate that the profitability of the company can be enhanced through an increase in the frequency of installments, particularly in situations where the rate of interest charged is high. Finally, to draw up effective guidelines, a sensitivity investigation is conducted for all cost parameters.