The model and algorithm for determining optimal ordering/trade-credit policy of supply chains

This paper develops a model for determining ordering/trade-credit policy of a supply chain, where one supplier sells a product to a retailer, who faces a deterministic demand, and may offer the retailer two types of trade credit contracts: a “one-part” or a “two-part” contract. We discuss the existence of the optimal solution to the model, and provide a simple algorithm for finding the optimal ordering and trade credit policy of two members. We specify the conditions under which it is beneficial in reducing operational cost for the supplier to offer the two trade credit contracts. Through numerical experiments, we reveal that it is more superior in reducing operational cost for the supplier to offer a two-part credit than to offer a one-part credit, which can be extended to a multi-part credit. The sensitivity analysis is presented at the end of the paper.