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An EOQ model for deteriorating items under trade credits

Author

Listed:
  • L-Y Ouyang

    (Tamkang University, Tamsui)

  • C-T Chang

    (Tamkang University, Tamsui)

  • J-T Teng

    (William Paterson University of New Jersey)

Abstract

In the classical inventory economic order quantity (or EOQ) model, it was assumed that the supplier is paid for the items immediately after the items are received. However, in practices, the supplier may simultaneously offer the customer: (1) a permissible delay in payments to attract new customers and increase sales, and (2) a cash discount to motivate faster payment and reduce credit expenses. In this paper, we provide the optimal policy for the customer to obtain its minimum cost when the supplier offers not only a permissible delay but also a cash discount. We first establish a proper model, and then characterize the optimal solution and provide an easy-to-use algorithm to find the optimal order quantity and replenishment time. Furthermore, we also compare the optimal order quantity under supplier credits to the classical economic order quantity. Finally, several numerical examples are given to illustrate the theoretical results.

Suggested Citation

  • L-Y Ouyang & C-T Chang & J-T Teng, 2005. "An EOQ model for deteriorating items under trade credits," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 56(6), pages 719-726, June.
    • Handle: RePEc:pal:jorsoc:v:56:y:2005:i:6:d:10.1057_palgrave.jors.2601881
    DOI: 10.1057/palgrave.jors.2601881
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    References listed on IDEAS

    as
    1. J-T Teng & H-L Yang, 2004. "Deterministic economic order quantity models with partial backlogging when demand and cost are fluctuating with time," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 55(5), pages 495-503, May.
    2. Robert A. Davis & Norman Gaither, 1985. "Optimal Ordering Policies Under Conditions of Extended Payment Privileges," Management Science, INFORMS, vol. 31(4), pages 499-509, April.
    3. Nita Shah, 1997. "Probabilistic order level system with lead time when delay in payments are permissible," TOP: An Official Journal of the Spanish Society of Statistics and Operations Research, Springer;Sociedad de Estadística e Investigación Operativa, vol. 5(2), pages 297-305, December.
    4. Arcelus, F. J. & Shah, Nita H. & Srinivasan, G., 2001. "Retailer's response to special sales: price discount vs. trade credit," Omega, Elsevier, vol. 29(5), pages 417-428, October.
    5. J-T Teng, 2002. "On the economic order quantity under conditions of permissible delay in payments," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 53(8), pages 915-918, August.
    6. Liao, Hung-Chang & Tsai, Chih-Hung & Su, Chao-Ton, 2000. "An inventory model with deteriorating items under inflation when a delay in payment is permissible," International Journal of Production Economics, Elsevier, vol. 63(2), pages 207-214, January.
    7. Shah, Nita. H., 1993. "Probabilistic time-scheduling model for an exponentially decaying inventory when delays in payments are permissible," International Journal of Production Economics, Elsevier, vol. 32(1), pages 77-82, August.
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