Replenishment policies considering trade credit and logistics risk

This paper develops an inventory model with non-instantaneous delivery under trade credit and logistics risk. The objective is to determine the optimal replenishment policy for a retailer, given uncertainty in a supply chain due to unforeseeable disruption or various types of defect (e.g. shipping damage, missing parts, misplaced products and/or disasters such as earthquake or hurricane). We provide two solution procedures from the perspective of risk-neutral and risk-averse, respectively. For the risk-neutral solution, the retailer determines the cycle time to minimize the expected total cost. For the risk-averse solution, the model limits the solution space to the set of cycle times, which guarantees an upper bound of defective products under contingency. This risk management operations research technology is very useful in the case of a low-probability high-consequence contingency event. We conclude with computational examples that lead to a comparison of these two solution procedures.