Inventory and credit decisions for time-varying deteriorating items with up-stream and down-stream trade credit financing by discounted cash flow analysis

Abstract

In today`s competitive markets, most firms in United Kingdom and United States offer their products on trade credit to stimulate sales and reduce inventory. Trade credit is calculated based on time value of money on the purchase cost (i.e., discounted cash flow analysis). Recently, many researchers use discounted cash flow analysis only on the purchase cost but not on the revenue (which is significantly larger than the purchase cost) and the other costs. For a sound and rigorous analysis, we should use discounted cash flow analysis on revenue and costs. In addition, expiration date for a deteriorating item (e.g., bread, milk, and meat) is an important factor in consumer`s purchase decision. However, little attention has been paid to the effect of expiration date. Hence, in this paper, we establish a supplier-retailer-customer supply chain model in which: (a) the retailer receives an up-stream trade credit from the supplier while grants a down-stream trade credit to customers, (b) the deterioration rate is non-decreasing over time and near 100 percent particularly close to its expiration date, and (c) discounted cash flow analysis is adopted for calculating all relevant factors: revenue and costs. The proposed model is an extension of more than 20 previous papers. We then demonstrate that the retailer`s optimal credit period and cycle time not only exist but also are unique. Thus, the search of the optimal solution reduces to a local one. Finally, we run several numerical examples to illustrate the problem and gain managerial insights. © 2014 Elsevier B.V. All rights reserved.