Retailer’s replenishment and credit policies for deteriorating inventory under credit period-dependent demand and bad-debt loss

Abstract

The business world survives on trade credit financing. The three players, viz. supplier, retailer, and customer, are building blocks of any business firm. The retailer receives credit period from the supplier to settle the accounts due against the purchases. For retailer, the customer is a prominent stakeholder. To withstand the competitive market and generate credit sales and cash sales, the retailer offers credit period to attract more customers. This will boost the demand for the retailer and consequently the supplier. The offer of credit period by the result may result in bad-debt loss when the customer declares incapability to do the payment. The situation worsens when the items in the inventory system are subject to deterioration. In this article, a mathematical model is formulated to determine the optimal replenishment time and credit period under two levels of trade credit financing when the demand and bad-debt loss depend on the length of the credit period. The profit per unit time of the retailer is maximized by optimizing the cycle time and date-terms credit period when items in the inventory deteriorate at a constant rate. A numerical example is given to validate the proposed model. Sensitivity analysis is carried out and observations are deduced.