Retailer’s optimal ordering and payment strategy under two-level and flexible two-part trade credit policy

Abstract

Trade credit has been widely used as a marketing strategy to boost sales and a tool for short-term financing. The existing literature usually study flexible two-part trade credit contract and two-level trade credit policy separately. In this paper, an inventory model is formulated for a supply chain simultaneously adopting flexible trade credit contract and two-level trade credit policy. In particular, the supplier offers the retailer with a flexible two-part trade credit contract, which allows the retailer to pay any fraction of the purchasing cost within a short credit period at a discounted price and the rest at full price within the maturity of the contract. Meanwhile, the retailer allows his/her customer to defer payment for a fixed period of time. The inventory model aims at determining the retailer’s optimal ordering and payment strategy. A solution procedure is proposed and closed-form solutions are derived. Numerical results indicate that offering flexible trade credit can reduce the retailer’s total cost while offering two-level trade credit contract will increase the retailer’s total cost and reduce the retailer’s early payment fraction.