Inventory control and purchasing-III

Standard inventory theory assumes that the capital investment component of stockholding costs is incurred the instant a replenishment order is received and ceases to apply the instant the stock is sent to production or to customers. Thus the capital investment in stocks is assumed to move up and down exactly as the physical stocks move up and down. In practice a company does not pay the supplier for the replenishment order until some time after its delivery. The two most commonly used payment systems are: (A) Payment within a specified period after delivery of the order. (B) Payment by some specified time in the month following delivery. The existence of delayed payment and credit terms affects the stockholding component of the inventory control model. The issues raised here received little attention until recently. This paper describes recent research in this area by Kingsman, Goyal, Chapman et al. and Daellenbach and the implications for practical ordering policies.