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Seller's optimal replenishment policy and payment term among advance, cash, and credit payments

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  • Li, Ruihai
  • Skouri, Konstantina
  • Teng, Jinn-Tsair
  • Yang, Wen-Goang

Abstract

It is evident that granting a short-term interest-free loan (i.e., a credit payment) stimulates more sales than asking for an advance payment. In addition, it is obvious that a 30-year mortgage has a higher default risk than a 15-year mortgage. As a result, it can be inferred that the longer the credit period, the higher the sales volume as well as the higher the default risk. Conversely, there are no default risks with an advance payment. Also, the longer the prepayment period (i.e., advance period), the lower the sales volume but the higher the interest earned. In this paper we incorporate the above mentioned important and relevant phenomena into the proposed model. Hence, the payment period and the replenishment cycle time are decision variables. We then derive the seller's profit under each of the three payment terms: advance payment, cash payment, and credit payment. In addition, we obtain explicit closed-form solutions to the problem, and explain them by simple economic interpretations. Furthermore, we demonstrate that an increase in selling price elevates the payment period, while an increase in purchasing cost reduces the payment period. Finally, we perform sensitivity analyses to examine the impacts of financial related parameters on the seller's decisions and profits, and then provide several managerial insights. For example, if the impact of advance payment on demand is relatively smaller than that of credit payment, then it is more profitable for the seller to ask for an advance payment than to offer a credit payment, and vice versa.

Suggested Citation

  • Li, Ruihai & Skouri, Konstantina & Teng, Jinn-Tsair & Yang, Wen-Goang, 2018. "Seller's optimal replenishment policy and payment term among advance, cash, and credit payments," International Journal of Production Economics, Elsevier, vol. 197(C), pages 35-42.
    • Handle: RePEc:eee:proeco:v:197:y:2018:i:c:p:35-42
    DOI: 10.1016/j.ijpe.2017.12.015
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    Cited by:

    1. Lin Feng & Konstantina Skouri & Wan-Chih Wang & Jinn-Tsair Teng, 2022. "Optimal selling price, replenishment cycle and payment time among advance, cash, and credit payments from the seller’s perspective," Annals of Operations Research, Springer, vol. 315(2), pages 791-812, August.
    2. Raj, Praveen Vijaya Raj Pushpa & Nagarajan, Bagathsingh & Schoenherr, Tobias & Ramkumar, M., 2023. "A comparative investigation of a seller’s disaster payment period policy," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 171(C).
    3. Chang, Chun-Tao & Ouyang, Liang-Yuh & Teng, Jinn-Tsair & Lai, Kuei-Kuei & Cárdenas-Barrón, Leopoldo Eduardo, 2019. "Manufacturer's pricing and lot-sizing decisions for perishable goods under various payment terms by a discounted cash flow analysis," International Journal of Production Economics, Elsevier, vol. 218(C), pages 83-95.
    4. Shi, Yan & Zhang, Zhiyong & Chen, Sheng-Chih & Cárdenas-Barrón, Leopoldo Eduardo & Skouri, Konstantina, 2020. "Optimal replenishment decisions for perishable products under cash, advance, and credit payments considering carbon tax regulations," International Journal of Production Economics, Elsevier, vol. 223(C).
    5. Peng, Juan & Zhou, Zhili, 2019. "Working capital optimization in a supply chain perspective," European Journal of Operational Research, Elsevier, vol. 277(3), pages 846-856.
    6. Shi, Yan & Zhang, Zhiyong & Tiwari, Sunil & Yang, Lei, 2023. "Pricing and replenishment strategy for a perishable product under various payment schemes and cap-and-trade regulation," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 174(C).
    7. Wang, Kai & Ding, Peiqi & Zhao, Ruiqing, 2021. "Strategic credit sales to express retail under asymmetric default risk and stochastic market demand," Omega, Elsevier, vol. 101(C).
    8. Ruihai Li & Jinn-Tsair Teng & Chun-Tao Chang, 2021. "Lot-sizing and pricing decisions for perishable products under three-echelon supply chains when demand depends on price and stock-age," Annals of Operations Research, Springer, vol. 307(1), pages 303-328, December.
    9. Ruihai Li & Jinn-Tsair Teng & Yingfei Zheng, 2019. "Optimal credit term, order quantity and selling price for perishable products when demand depends on selling price, expiration date, and credit period," Annals of Operations Research, Springer, vol. 280(1), pages 377-405, September.
    10. Ariful Islam & Adil Mansoor & Mostafizur Rahman & Sazali Abd Wahab, 2020. "Adjusting A Strategic Cash-Flow Model For Bangladeshi Small And Medium Enterprises: The Art Of Surviving Covid-19 Emergency," Business Excellence and Management, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 10(5), pages 194-213, October.
    11. Bo Yan & Yanping Liu & Zijie Jin, 2023. "Joint coordination contract for capital‐constrained supply chains under asymmetric information," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(1), pages 251-270, January.
    12. Yan Shi & Zhiyong Zhang & Sunil Tiwari & Zhiwen Tao, 2022. "Retailer's optimal strategy for a perishable product with increasing demand under various payment schemes," Annals of Operations Research, Springer, vol. 315(2), pages 899-929, August.
    13. Mei-Chuan Cheng & Hui-Chiung Lo & Chih-Te Yang, 2023. "Optimizing Pricing, Pre-Sale Incentive, and Inventory Decisions with Advance Sales and Trade Credit under Carbon Tax Policy," Mathematics, MDPI, vol. 11(11), pages 1-18, May.
    14. Yu-Chung Tsao & Aisyah Dewi Muthi’ah & Thuy-Linh Vu & Niniet Indah Arvitrida, 2021. "Supply chain network design under advance-cash-credit payment," Annals of Operations Research, Springer, vol. 305(1), pages 251-272, October.

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