Buyer-vendor inventory coordination with credit period incentives

In this paper, a single-vendor, a single-buyer supply chain for a single product is considered and a model to study and analyze the benefit of coordinating supply chain inventories through the use of credit period is proposed. Under the proposed strategy, the vendor requests the buyer to alter his current order size such that the vendor can benefit from lower set up, ordering and inventory holding costs. To entice the buyer to accept this strategy, the vendor must compensate the buyer for his increased inventory cost, and possibly provide an additional saving by offering the buyer an order size dependent credit period such that the buyer is dispensed with interest on the money payable during the credit period. The optimal replenishment period of the vendor and the credit period are determined as a solution to the coordinating supply chain model. An optimization method and a detailed numerical study are used to evaluate the benefit of the proposed coordinated strategy.