%0 Journal Article
%T Inventory and Credit Decisions under Day-Terms Credit Linked Demand and Allowance for Bad Debts
%A K. K. Aggarwal
%A Arun Kumar Tyagi
%J Advances in Decision Sciences
%D 2014
%I Hindawi Publishing Corporation
%R 10.1155/2014/678561
%X In order to stimulate demand of their product, firms generally give credit period to their customers. However, selling on credit exposes the firms to the additional dimension of bad debts expense (i.e., customer¡¯s default). Moreover, credit period through its influence on demand becomes a determinant of inventory decisions and inventory sold on credit gets converted to accounts receivable indicating the interaction between the two. Since inventory and credit decisions are interrelated, inventory decisions must be determined jointly with credit decisions. Consequently, in this paper, a mathematical model is developed to determine inventory and credit decisions jointly. The demand rate is assumed to be a logistic function of credit period. The accounts receivable carrying cost along with an explicit consideration of bad debt expense which have been often ignored in previous models are incorporated in the present model. The discounted cash flow approach (DCF) is used to develop the model and the objective is to maximize the present value of the firm¡¯s net profit per unit time. Finally, numerical example and sensitivity analysis have been done to illustrate the effectiveness of the proposed model. 1. Introduction The basic purpose of a firm is maximization of its present value and in order to achieve this goal proper inventory management is an important aspect. The basic objective of any inventory control system is to satisfy the future demand in a best possible manner. The classical EOQ model assumes that demand cannot be influenced by the decision maker. However, decision maker can influence the demand by giving credit period to its customers. Trade credit is used by the firms as a marketing strategy to stimulate demand by attracting the customers who consider it to be a type of price reduction. Moreover, to realize sales from customers who do not have money for instant payment the firm must wait until they resell the goods before doing the payment. Many customers would like to verify the quality of firm¡¯s product prior to making the payment. In such circumstances, firm allows sales on credit so that it can sell more goods in comparison to when it relies only on cash sales. Teng [1] also illustrated two benefits of trade credit policy to the supplier: (1) it should attract new customers who consider it to be a type of price reduction; (2) it should cause a reduction in the sales outstanding, since some established customers will pay more promptly in order to take advantage of permissible delay more frequently. The two common forms of trade credit are
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