The EOQ with defective items and partially permissible delay in payments linked to order quantity derived algebraically

Most researchers established their inventory lot‐size models under trade credit financing by assuming that the supplier offers the retailer fully permissible delay in payments and the products received are all non‐defective. However, in the real business environment, it often can be observed that the supplier offers the retailer a fully permissible delay in payments only when the order quantity is greater than or equal to the predetermined quantity Q d . In addition, an arriving order lot usually contains some defective items due to imperfect production processes or other factors. To capture this reality, the paper extends Huang (2007) economic order quantity (EOQ) model with partially permissible delay in payments to consider defective items. We formulate the proposed problem as a profit maximization EOQ model in which the replenishment cycle time is the decision variable. Then we use the arithmetic‐geometric mean inequality approach to determine the optimal solution under various situations. An algorithm to obtain the optimal solution is also provided. Finally, the numerical examples and sensitivity analysis are given to illustrate the results.