| Summary: | In practice, a firm usually receives trade credit financing from its supplier
on the purchase of inventory. Similarly, in order to meet competition and
generate credit sales over and above cash sales, the firm also gives credit
period to their customers. However, the decision of granting credit period
may have a disintegrating effect on cash sales apart from generating new
credit sales because some of the cash customers may switch to credit
purchase. In addition, despite of the best credit granting policies and
collection practices, the firm may incurs some amount of bad debt losses
because a certain fraction of buyers will undoubtedly be unable to pay off
their debt obligations and become bad debt loss to the firm. In this paper,
using discounted cash flow (DCF) approach, a mathematical model is developed
to jointly determine optimal inventory and credit policies under two levels
of trade credit financing when demand and bad-debt losses are dependent on
credit period. The objective of the model is to maximize the present value of
firm’s net profit per unit time by jointly optimizing the replenishment
interval and date-terms credit period. Numerical examples and sensitivity
analysis are presented to illustrate the effectiveness of the proposed model,
and the results are discussed.
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