Optimal order quantity with endogenous discounted partial advance payment and trade-credit for inventory model with linear time varying demand (Q2113798)

Summary: When buyers seek extended credit periods from relatively less secure suppliers, the supplier requires co-operation from the buyer for purchase of raw materials, etc., in terms of partial advance payment. For a single buyer single supplier supply chain, we develop an inventory model with a hybrid payment policy combining discounted advance payment to supplier with the supplier permitting interest free delay period to the buyer when buyer has the option to make advance payment. For the advance, supplier offers discount and may allow the buyer to set the discount rate and the advance proportion. For a linear demand function in such a scenario, we maximise buyer's net profit rate through optimal choice of payment policy and the buyer's replenishment. We consider two situations with discount: 1) exogenous; 2) endogenous for the buyer. Optimal solution is characterised theoretically. Numerical example reveals that by choosing advance proportion appropriately, the profit rate in the endogenous case can be higher than that in the exogenous case even with lower discount.