Economic Ordered Quantity Model with Partial Delay in Payments

Abstract

The classical economic order quantity model assumes that the supplier is paid for the items at the moment the order is received. However, often in practice, the supplier provides the purchasers a permissible delay in payment for the items supplied. In this research, we develop an economic order quantity model in which the supplier allows partial delay in payment, whereby a fraction of the order cost is paid upon receipt, and the rest after a fixed period of time, and subject to interest. An extension is developed, to reflect the real-life business situations, where suppliers offer the credit terms in conjunction with a cash discount. We derive the optimal ordering policy of both models. Furthermore, a comparison between the classical and our partial trade credit EOQ models is done to identify the ideal interest rates that favor adopting delay in payment for the retailer. Finally, numerical examples are presented, the results are discussed, and managerial insights are presented