A comparative investigation of a seller’s disaster payment period policy

Praveen Vijaya Raj Pushpa Raj, Bagathsingh Nagarajan, Tobias Schoenherr and M. Ramkumar

Transportation Research Part E: Logistics and Transportation Review, 2023, vol. 171, issue C

Abstract: Sellers can offer various payment schemes for buyers to boost demand, with the advance, cash, and credit payment policies being popular approaches. To provide further insight into the dynamics of these policies, we consider them in addition to a Disaster Grace Period payment option, which has become increasingly prevalent. The seller’s motivation for offering Advance, Cash, Credit or Disaster Grace Period (ACCD) payment options include the desire for a stronger relationship to the buyer, a smoother cash flow throughout the supply chain, and a potential increase in demand. In addition, the disaster grace period payment scheme can help in better navigating worldwide emergencies, such as pandemics, but also natural emergencies like severe storms, floods, tornadoes, and landslides, which have been happening with an increasing frequency over the last decades. However, the increase in the payment period increases the default/disaster risk, rendering a trade-off between risk and demand, making these crucial parameters in influencing the seller’s profit. Within this context, we aim to find the optimum replenishment cycle and payments period for a seller to increase their total profit. To do so, we perform numerical analysis to examine the impact of the demand coefficient, interest rate, default risk, disaster risk, and the disaster demand coefficient on profit. The results offer managerial insights on which payment option to choose in a particular setting to maximize profit. We for example find that sellers should offer a disaster grace period when the disaster demand increases and the risk of a disaster decreases.

Keywords: Disaster grace period; Advance payments; Credit period; Payment sensitive demand (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1016/j.tre.2022.103009

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