Continuous Review Inventory Model with a Partial Delay in Payment

Abstract

In the classical continuous review inventory model, it is assumed that the supplier is paid at the moment the order is received. However, often in practice, the supplier provides the purchaser (the retailer) a permissible delay in payment for the items supplied. In this research, we assume that the supplier allows a partial delay in payments, whereby a fraction of the order cost is paid upon receipt of the order, and the rest after a fixed period of time, and subject to interest. Under these conditions, we propose to determine the optimal ordering quantity and the reordering level. Furthermore, a comparison between the classical and partial delay in payment models is done to identify the ideal financing conditions that favor adopting a delay in payment for the retailer. Our analytical results showed that the retailer can either pay the full amount at the moment the items are received, or delay all the payment until the next replenishment order. Moreover, for a given fraction of upon-receipt payment, we can determine the optimal order quantity and reorder point.