Trade Credit Term Decisions under Centralized Decisions

Abstract

In this article, we studies the optimal trade credit term decision under the centralized decision making in an extended economic ordering quantity framework. We divide the trade credit policy into two parts: j TM ≤ and j TM > .The objective of this research is to determine the optimal credit term to maximize the joint total profit per unit time. Furthermore, numerical study and sensitivity analysis are presented to illustrate the results of the proposed model and to draw managerial insights. In business operations, due to the uncertainty of the procurement, production and sales aspects, business will be a shortage of funds. China's small and medium -sized enterprises have capital constraint, it is difficult to solve this problem. This will not only hinder their own development, also affect the profit of other companies in the supply chain. Now, there are two common ways: First is the bank credit; the second is trade credit. The first study is a bit of more, the second way is relatively lake. So, this paper studies of the second way. Trade Credit is an important coordination mechanism between manufacturers and retailers. It can share the cost, transfer the risks and regulate the benefits. Trade credit term is the length of time allowed retailer to delay payment, it is the core concern of credit term decisions. This paper study the issue of trade credit term decision under a centralized decision-making, how to set the optimal trade credit term to make the supply chain system's profit maximization, and the sensitivity analysis of trade credit term. 2 Literature review When the buyers and suppliers exchange goods/services, they usually have to agree on trade terms. These trade terms consist of delivery and prices and payment conditions. Now trade credit for goods/services is a very common business practice, the optimal length of trade credit is the core concern of credit term decisions. Shi and Zhang (2010) incorporated default risk into the supplier's decision. Numerical study suggested that the optimal trade credit term increases with the buyer's capital cost, and decreased with the supplier's capital cost, the demand rate,