Optimal strategy of deteriorating items with capacity constraints under two-levels of trade credit policy

Abstract In the existing literatures about trade credit, there are two payment methods to be adopted, one is the retailer pays off all units sold and keeps the profits for other uses and the other is the retailer pays off the amount owed to the supplier whenever the retailer has money obtained from sales. Based upon the latter payment method, this article will develop an inventory model by considering two levels of trade credit, limited storage capacity and assuming the retailer can delay incurring interest charges on the unpaid and overdue balance due to the difference between interest earned and interest charged. Four theorems for determining the optimal replenishment cycle time to minimize are developed. Finally, numerical examples are used to illustrate all of the study theorems.

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