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A Stochastic Inventory Model with Trade Credit

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Author Info

  • Diwakar Gupta

    ()
    (Department of Mechanical Engineering, University of Minnesota, Minneapolis, Minnesota 55455)

  • Lei Wang

    ()
    (SmartOps Corporation, Pittsburgh, Pennsylvania 15212)

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    Abstract

    Suppliers routinely sell goods to retailers on credit. Common credit terms are tantamount to a schedule of declining discounts (escalating penalties) that depend on how long the retailer takes to pay off the supplier's loan. However, issues such as which stocking policies are optimal in the presence of supplier-provided credit have been investigated only when demand is assumed deterministic. Nearly all stochastic inventory models assume either time-invariant finance charges or charges that may vary with time but not with the age of the credit. In this article we present a discrete time model of the retailer's operations with random demand, which is used to prove that the structure of the optimal policy is not affected by credit terms, although the value of the optimal policy parameter is. This is followed by a continuous time model, which leads to an algorithm for finding the optimal stock level. We also model the supplier's problem and calculate the optimal credit parameters in numerical experiments.

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    File URL: http://dx.doi.org/10.1287/msom.1070.0191
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    Bibliographic Info

    Article provided by INFORMS in its journal Manufacturing & Service Operations Management.

    Volume (Year): 11 (2009)
    Issue (Month): 1 (November)
    Pages: 4-18

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    Handle: RePEc:inm:ormsom:v:11:y:2009:i:1:p:4-18

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    Related research

    Keywords: trade credit; finance and inventory models;

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    Cited by:
    1. Hwan Lee, Chang & Rhee, Byong-Duk, 2010. "Coordination contracts in the presence of positive inventory financing costs," International Journal of Production Economics, Elsevier, vol. 124(2), pages 331-339, April.
    2. Wuttke, David A. & Blome, Constantin & Henke, Michael, 2013. "Focusing the financial flow of supply chains: An empirical investigation of financial supply chain management," International Journal of Production Economics, Elsevier, vol. 145(2), pages 773-789.
    3. Seifert, Daniel & Seifert, Ralf W. & Protopappa-Sieke, Margarita, 2013. "A review of trade credit literature: Opportunities for research in operations," European Journal of Operational Research, Elsevier, vol. 231(2), pages 245-256.
    4. Lee, Chang Hwan & Rhee, Byong-Duk, 2011. "Trade credit for supply chain coordination," European Journal of Operational Research, Elsevier, vol. 214(1), pages 136-146, October.

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