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A Stochastic Inventory Model with Trade Credit

  • Diwakar Gupta

    ()

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

  • Lei Wang

    ()

    (SmartOps Corporation, Pittsburgh, Pennsylvania 15212)

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    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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    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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    1. 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.
    2. Mitchell A. Petersen & Raghuram G. Rajan, . "Trade Credit: Theories and Evidence," CRSP working papers 322, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    3. 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.
    4. 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.
    5. Diwakar Gupta & Yigal Gerchak, 2002. "Quantifying Operational Synergies in a Merger/Acquisition," Management Science, INFORMS, vol. 48(4), pages 517-533, April.
    6. 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.
    7. William Beranek, 1967. "Financial Implications of Lot-Size Inventory Models," Management Science, INFORMS, vol. 13(8), pages B401-B408, April.
    8. Volodymyr Babich & Matthew J. Sobel, 2004. "Pre-IPO Operational and Financial Decisions," Management Science, INFORMS, vol. 50(7), pages 935-948, July.
    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. Smith, Janet Kiholm, 1987. " Trade Credit and Informational Asymmetry," Journal of Finance, American Finance Association, vol. 42(4), pages 863-72, September.
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