Retailer's optimal ordering policy under two stage trade credit financing

Usually it is assumed that the supplier would offer a fixed credit period to the retailer but the retailer in turn would not offer any credit period to its customers, which is unrealistic, because in real practice retailer might offer a credit period to its customers in order to stimulate his own demand. Moreover, it is observed that credit period offered by the retailer to its customers has a positive impact on demand of an item but the impact of credit period on demand has received a very little attention by the researchers. To incorporate this phenomenon, this paper develops an inventory model under two levels of trade credit policy by assuming the demand is a function of credit period offered by the retailer to the customers using discounted cash flow (DCF) approach. A DCF approach permits a proper recognition of the exact timing of cash flows associated with an inventory system under the trade credit. A theorem is then developed to determine the optimal replenishment policy for the retailer. Finally, numerical example is presented to illustrate the theoretical results followed by the sensitivity of parameters on the optimal solution.