Inventory models for deteriorating items with maximum lifetime under downstream partial trade credits to credit-risk customers by discounted cash-flow analysis

Getting loans from banks are almost impossible after 2008 global financial crisis. As a result, about 80% of companies in United Kingdom and United States offer their products on various short-term, free-interest loans (i.e., trade credit) to customers. Numerous researchers and academicians apply discounted cash flow (DCF) analysis merely to compute the interest earned and charged during the credit period but not to the revenue and other costs which are considerably larger than the interest earned and charged. For a rigorous analysis, the DCF on all relevant costs is applied. In addition, many products deteriorate continuously and cannot be sold after their maximum lifetimes or expiration dates. However, very few researchers and investigators have implemented the product lifetime expectance into their models. In this paper, a supplier–retailer–customer chain system is developed in which the retailer gets an upstream full trade credit from the supplier whereas offers a downstream partial trade credit to credit-risk customers, the deterioration rate is non-decreasing over time and near 100% particularly close to its expiration date, and DCF analysis is applied to compute all relevant costs. This paper demonstrates that the retailer’s optimal replenishment cycle time not only exists but also is unique. Thus, the search of the global optimal reduces to finding a local solution. Finally, several numerical examples and sensitivity analysis are performed in order to illustrate the problem and obtain managerial insights.