A joint optimal ordering and delivery policy for an integrated supplier–retailer inventory model with trade credit and defective items

In this paper, we propose an integrated supplier–retailer inventory model in which both supplier and retailer have adopted trade credit policies, and the retailer receives an arriving lot containing some defective items. The customer’s market demand rate depends on the length of the credit period offered by retailer. Our objective is to determine the retailer’s optimal order cycle length, the order quantity, and the optimal number of shipments per production run from the supplier to the retailer so that the entire supply system has maximum profit. We develop an algorithm to find the optimal solution for the supply chain. Several numerical examples are provided to illustrate the theoretical results, and sensitivity analysis of major parameters including the defective rate in a production batch, the retailer’s trade credit period and the customer’s trade credit period in the model are presented.