Retailer’s ordering and payment policy under trade credit and cash discount

Abstract

Goyal (1985) is frequently cited when the inventory systems under condition of trade credit financing are discussed. One of Goyal’s assumptions is that the unit selling price and the unit purchasing price are equal. However, in practice, the unit selling price is not lower than the unit purchasing price in general. Consequently, the view point of Goyal is debatable sometimes.

Besides, this paper will incorporate the cash discount policy for early payment into Goyal’s model. This is a practical and new issue. So, the main purpose of this paper wants to extend and modify Goyal’s model with cash discount and the unit selling price not lower than the unit purchasing price to reflect the real-life business situations. Mathematical models have been derived for obtaining the optimal cycle time and optimal payment policy for item under cash discount and trade credit financing so that the annual total relevant cost is minimized. Moreover, three theorems are developed to efficiently determine the optimal cycle time, the optimal order quantity and the optimal payment time. Finally, numerical examples are given to illustrate these theorems.

Keywords:

• EOQ
• trade credit
• cash discount
• permissible delay in payments
• inventory