Economic order quantity under trade-credit financing

Abstract

This study shows, through an alternative development of the deterministic economic order quantity (EOQ) model, how the accounts payable policy affects are costs of operating the inventory system and the EOQ. By minimizing the present value of costs as a function of the investment in inventory, optimal order quantity is obtained. The optimal decision rule as to the use of cash discount or credit option is derived. Through this study, it is shown that the relationship between inventory policy and trade-credit policy in the context of basic lot size model and inventory model with known price increase. Numerical examples are given to illustrate the effect of trade-credit financing on the inventory systems.