IPP with credit facility on raw material.

Abstract

This paper develops two models that aim at studying the optimal production policy for a manufacturer. The inventory models presented in this paper are based on the classic Economic Production Quantity (EPQ) analysis. In the first base model, we determine the optimal production policy by accounting for the inventories of the raw material and the finished products. In this base model, the production policy consists of determining the number of batches of raw material to order for multiple identical production cycles, in addition to the optimal production quantity in each cycle. In the second model, we determine the optimal production policy with an additional fixed credit facility period for settling the procurement cost. A closed-form formula of the optimal number of production cycles is obtained in the first model and a thorough analysis is made to find that number for the second model. In addition to incorporating the effect of trade credit of raw material in the EPQ, our results could aid manufacturers in deciding on different supplier offers related to delays in payment.