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A Stochastic Inventory Model with Trade Credit

Author

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  • Diwakar Gupta

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

  • Lei Wang

    () (SmartOps Corporation, Pittsburgh, Pennsylvania 15212)

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.

Suggested Citation

  • Diwakar Gupta & Lei Wang, 2009. "A Stochastic Inventory Model with Trade Credit," Manufacturing & Service Operations Management, INFORMS, vol. 11(1), pages 4-18, November.
  • Handle: RePEc:inm:ormsom:v:11:y:2009:i:1:p:4-18
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    File URL: http://dx.doi.org/10.1287/msom.1070.0191
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    References listed on IDEAS

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    1. Volodymyr Babich & Matthew J. Sobel, 2004. "Pre-IPO Operational and Financial Decisions," Management Science, INFORMS, vol. 50(7), pages 935-948, July.
    2. Nicholas Wilson & Barbara Summers, 2002. "Trade Credit Terms Offered by Small Firms: Survey Evidence and Empirical Analysis," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 29(3&4), pages 317-351.
    3. Smith, Janet Kiholm, 1987. " Trade Credit and Informational Asymmetry," Journal of Finance, American Finance Association, vol. 42(4), pages 863-872, September.
    4. Petersen, Mitchell A & Rajan, Raghuram G, 1997. "Trade Credit: Theories and Evidence," Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 661-691.
    5. Diwakar Gupta & Yigal Gerchak, 2002. "Quantifying Operational Synergies in a Merger/Acquisition," Management Science, INFORMS, vol. 48(4), pages 517-533, April.
    6. 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.
    7. Charles W. Haley & Robert C. Higgins, 1973. "Inventory Policy and Trade Credit Financing," Management Science, INFORMS, vol. 20(4-Part-I), pages 464-471, December.
    8. William Beranek, 1967. "Financial Implications of Lot-Size Inventory Models," Management Science, INFORMS, vol. 13(8), pages 401-408, April.
    9. John A. Buzacott & Rachel Q. Zhang, 2004. "Inventory Management with Asset-Based Financing," Management Science, INFORMS, vol. 50(9), pages 1274-1292, September.
    10. John R. Birge, 2000. "Option Methods for Incorporating Risk into Linear Capacity Planning Models," Manufacturing & Service Operations Management, INFORMS, vol. 2(1), pages 19-31, August.
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    Citations

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    Cited by:

    1. 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.
    2. 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.
    3. repec:pal:jorsoc:v:68:y:2017:i:5:d:10.1057_s41274-016-0009-2 is not listed on IDEAS
    4. repec:eee:transe:v:106:y:2017:i:c:p:276-293 is not listed on IDEAS
    5. van der Vliet, Kasper & Reindorp, Matthew J. & Fransoo, Jan C., 2015. "The price of reverse factoring: Financing rates vs. payment delays," European Journal of Operational Research, Elsevier, vol. 242(3), pages 842-853.
    6. 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.
    7. Yuan Bian & David Lemoine & Thomas Yeung & Nathalie Bostel & Vincent Hovelaque & Jean-Laurent Viviani & Fabrice Gayraud, 2018. "A dynamic lot-sizing-based profit maximization discounted cash flow model considering working capital requirement financing cost with infinite production capacity," Post-Print halshs-01683781, HAL.
    8. Li Chen & A. Gürhan Kök & Jordan D. Tong, 2013. "The Effect of Payment Schemes on Inventory Decisions: The Role of Mental Accounting," Management Science, INFORMS, vol. 59(2), pages 436-451, September.
    9. 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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    Keywords

    trade credit; finance and inventory models;

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