This Article Full Text (PDF) Alert me when this article is cited Alert me if a correction is posted Services Email this article to a friend Similar articles in this journal Alert me to new issues of the journal Download to citation manager Citing Articles Citing Articles via Google Scholar Google Scholar Articles by Gupta, D. Articles by Wang, L. Search for Related Content

A Stochastic Inventory Model with Trade Credit

Department of Mechanical Engineering, University of Minnesota, Minneapolis, Minnesota 55455
SmartOps Corporation, Pittsburgh, Pennsylvania 15212
guptad{at}me.umn.edu
lwang{at}smartops.com

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.

Key Words: trade credit; finance and inventory models
History: Received: November 28, 2006; accepted: June 27, 2007.