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Optimal Ordering Policies Under Conditions of Extended Payment Privileges

Author

Listed:
  • Robert A. Davis

    (College of Business Administration, Texas A&M University, College Station, Texas 77843)

  • Norman Gaither

    (College of Business Administration, Texas A&M University, College Station, Texas 77843)

Abstract

This paper develops optimal order quantities for firms that are offered a one-time opportunity to delay payment for an order of a commodity. Such delayed payments result in a reduction of the effective purchase cost, which is a function of the return available on alternative investments, the number of units of the commodity ordered, and the length of the extended period. Optimal order quantities are developed for extended payment privileges that occur at a reorder point of between reorder points. Six suppliers' extended payment scenarios are evaluated. A simulation analysis is conducted to determine the sensitivity of derived models to changes in the various input parameters. The simulation with realistic parameter values reveals that the additional discounted order quantity is insensitive to large changes in the ordering cost and unit price; sensitive to changes in the carrying cost and return rate of funds, but without significantly affecting the total cost; and extremely sensitive to the annual demand. Simple analytic decision rules are provided to guide firms that are offered such extended payment privileges.

Suggested Citation

  • 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.
  • Handle: RePEc:inm:ormnsc:v:31:y:1985:i:4:p:499-509
    DOI: 10.1287/mnsc.31.4.499
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    File URL: http://dx.doi.org/10.1287/mnsc.31.4.499
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    Citations

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    Cited by:

    1. Yiju Wang & Hengxia Gao & Wei Xing, 2018. "Optimal replenishment and stocking strategies for inventory mechanism with a dynamically stochastic short-term price discount," Journal of Global Optimization, Springer, vol. 70(1), pages 27-53, January.
    2. 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.
    3. Hardik Soni & Nita H. Shah, 2008. "Optimal Ordering and Trade Credit Policy for EOQ Model," Indus Journal of Management & Social Science (IJMSS), Department of Business Administration, vol. 2(1), pages 66-76, June.
    4. Soni, Hardik & Shah, Nita H., 2008. "Optimal ordering policy for stock-dependent demand under progressive payment scheme," European Journal of Operational Research, Elsevier, vol. 184(1), pages 91-100, January.
    5. 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.
    6. Tersine, Richard J. & Barman, Samir, 1995. "Economic purchasing strategies for temporary price discounts," European Journal of Operational Research, Elsevier, vol. 80(2), pages 328-343, January.
    7. Shaposhnik, Yaron & Herer, Yale T. & Naseraldin, Hussein, 2015. "Optimal ordering for a probabilistic one-time discount," European Journal of Operational Research, Elsevier, vol. 244(3), pages 803-814.
    8. Dilip Kumar Sen & Saurav Datta & Siba Sankar Mahapatra, 2017. "Decision Support Framework for Selection of 3PL Service Providers: Dominance-Based Approach in Combination with Grey Set Theory," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., vol. 16(01), pages 25-57, January.
    9. Salameh, M. K. & Abboud, N. E. & El-Kassar, A. N. & Ghattas, R. E., 2003. "Continuous review inventory model with delay in payments," International Journal of Production Economics, Elsevier, vol. 85(1), pages 91-95, July.
    10. Chih-Te Yang & Liang-Yuh Ouyang & Kun-Shan Wu & Hsiu-Feng Yen, 2012. "Optimal ordering policy in response to a temporary sale price when retailer's warehouse capacity is limited," European Journal of Industrial Engineering, Inderscience Enterprises Ltd, vol. 6(1), pages 26-49.
    11. Mei-Chuan Cheng & Kuo-Ren Lou & Liang-Yuh Ouyang & Yun-Hwa Chiang, 2010. "The optimal ordering policy with trade credit under two different payment methods," TOP: An Official Journal of the Spanish Society of Statistics and Operations Research, Springer;Sociedad de Estadística e Investigación Operativa, vol. 18(2), pages 413-428, December.
    12. Luo, Jianwen, 2007. "Buyer-vendor inventory coordination with credit period incentives," International Journal of Production Economics, Elsevier, vol. 108(1-2), pages 143-152, July.
    13. Ramasesh, Ranga V., 2010. "Lot-sizing decisions under limited-time price incentives: A review," Omega, Elsevier, vol. 38(3-4), pages 118-135, June.
    14. B S Maddah & M Y Jaber & N E Abboud, 2004. "Periodic review (s, S) inventory model with permissible delay in payments," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 55(2), pages 147-159, February.
    15. Daning Sun & Maurice Queyranne, 2002. "Production and Inventory Model Using Net Present Value," Operations Research, INFORMS, vol. 50(3), pages 528-537, June.
    16. Chang, Chun-Tao, 2004. "An EOQ model with deteriorating items under inflation when supplier credits linked to order quantity," International Journal of Production Economics, Elsevier, vol. 88(3), pages 307-316, April.
    17. Govindan, Kannan & Palaniappan, Murugesan & Zhu, Qinghua & Kannan, Devika, 2012. "Analysis of third party reverse logistics provider using interpretive structural modeling," International Journal of Production Economics, Elsevier, vol. 140(1), pages 204-211.
    18. J-T Teng & S K Goyal, 2007. "Optimal ordering policies for a retailer in a supply chain with up-stream and down-stream trade credits," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 58(9), pages 1252-1255, September.

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