Joint optimization of retailer’s unit selling price and cycle length under two-stage credit policy when the end demand is price as well as credit period sensitive

Abstract

In most of the inventory models with trade credit, it is assumed that the supplier would offer a credit period to the retailer but the retailer in turn would not offer any credit period to his customers, which is termed as one stage credit policy, but this type of credit policy is debatable in most business transactions. As in reality, most of the retailer’s do offer the credit period to his customers in order to stimulate their demand. Such a situation where both the supplier as well as the retailer offers the credit period to their respective customers is known as two-stage credit policy. Although the presence of credit period has been incorporated in many inventory models but the impact of credit period on demand is unfortunately ignored. In reality, it is observed that demand of an item does depend upon the length of the credit period as well as price offered by the retailer. In order to incorporate this phenomenon, an inventory model has been developed, considering that the retailer’s sales are divided in two categories (i) on cash, (which is price sensitive) and (ii) on credit, (which is a function of customer’s credit period and price). A solution procedure is provided for determining the retailer’s optimal price and cycle length simultaneously. Finally, the results have been validated by numerical example.