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Optimal trade credit and order quantity when trade credit impacts on both demand rate and default risk

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  • K-R Lou

    (Tamkang University, Taipei, Taiwan, R.O.C.)

  • W-C Wang

    (Tamkang University, Taipei, Taiwan, R.O.C.)

Abstract

In practice, to attract new buyers and to avoid lasting price competition, a seller frequently offers its buyers a permissible delay in payment (ie, trade credit). However, the policy of granting a permissible delay in payment adds an additional dimension of default risk to the seller. In contrast to previous researchers for finding optimal solutions to buyers, we first propose an economic order quantity model from the seller's prospective to determine its optimal trade credit and order quantity simultaneously. In addition, we incorporate the important and relevant fact that trade credit has a positive impact on demand rate but a negative impact on receiving the buyer's debt obligations. Then the necessary and sufficient conditions to obtain the seller's optimal trade credit and order quantity are derived. An algorithm to determine the seller's optimal trade credit is also proposed. Finally, we use some numerical examples to illustrate the theoretical results and to provide some managerial insights.

Suggested Citation

  • K-R Lou & W-C Wang, 2013. "Optimal trade credit and order quantity when trade credit impacts on both demand rate and default risk," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 64(10), pages 1551-1556, October.
    • Handle: RePEc:pal:jorsoc:v:64:y:2013:i:10:p:1551-1556
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    Citations

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    Cited by:

    1. Vandana, & Kaur, Arshinder, 2019. "Two-level trade credit with default risk in the supply chain under stochastic demand," Omega, Elsevier, vol. 88(C), pages 4-23.
    2. Hong Cheng & Yingsheng Su & Jinjiang Yan & Xianyu Wang & Mingyang Li, 2019. "The Incentive Model in Supply Chain with Trade Credit and Default Risk," Complexity, Hindawi, vol. 2019, pages 1-11, May.
    3. Antonio Fabio Forgione & Carlo Migliardo, 2019. "An empirical analysis of the impact of trade credit on bank debt restructuring," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 36(2), pages 415-438, July.
    4. Tsao, Yu-Chung, 2019. "Coordinating contracts under default risk control-based trade credit," International Journal of Production Economics, Elsevier, vol. 212(C), pages 168-175.
    5. Wu, Jiang & Ouyang, Liang-Yuh & Cárdenas-Barrón, Leopoldo Eduardo & Goyal, Suresh Kumar, 2014. "Optimal credit period and lot size for deteriorating items with expiration dates under two-level trade credit financing," European Journal of Operational Research, Elsevier, vol. 237(3), pages 898-908.
    6. Chuan Zhang & Yu-xin Tian & Ling-wei Fan & Shu-min Yang, 2021. "Optimal ordering policy for a retailer with consideration of customer credit under two-level trade credit financing," Operational Research, Springer, vol. 21(4), pages 2409-2432, December.
    7. Tsao, Yu-Chung, 2017. "Managing default risk under trade credit: Who should implement Big-Data analytics in supply chains?," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 106(C), pages 276-293.
    8. Panagiota Papadimitri & Fotios Pasiouras & Menelaos Tasiou, 2021. "Do National Differences in Social Capital and Corporate Ethical Behaviour Perceptions Influence the Use of Collateral? Cross-Country Evidence," Journal of Business Ethics, Springer, vol. 172(4), pages 765-784, September.

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