Economics at your fingertips  

Seller's optimal replenishment policy and payment term among advance, cash, and credit payments

Ruihai Li, Konstantina Skouri, Jinn-Tsair Teng and Wen-Goang Yang

International Journal of Production Economics, 2018, vol. 197, issue C, 35-42

Abstract: It is evident that granting a short-term interest-free loan (i.e., a credit payment) stimulates more sales than asking for an advance payment. In addition, it is obvious that a 30-year mortgage has a higher default risk than a 15-year mortgage. As a result, it can be inferred that the longer the credit period, the higher the sales volume as well as the higher the default risk. Conversely, there are no default risks with an advance payment. Also, the longer the prepayment period (i.e., advance period), the lower the sales volume but the higher the interest earned. In this paper we incorporate the above mentioned important and relevant phenomena into the proposed model. Hence, the payment period and the replenishment cycle time are decision variables. We then derive the seller's profit under each of the three payment terms: advance payment, cash payment, and credit payment. In addition, we obtain explicit closed-form solutions to the problem, and explain them by simple economic interpretations. Furthermore, we demonstrate that an increase in selling price elevates the payment period, while an increase in purchasing cost reduces the payment period. Finally, we perform sensitivity analyses to examine the impacts of financial related parameters on the seller's decisions and profits, and then provide several managerial insights. For example, if the impact of advance payment on demand is relatively smaller than that of credit payment, then it is more profitable for the seller to ask for an advance payment than to offer a credit payment, and vice versa.

Keywords: Economic order quantity; Finance; Permissible delay in payment; Advance payment; Cash on delivery (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this article

International Journal of Production Economics is currently edited by R. W. Grubbström

More articles in International Journal of Production Economics from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

Page updated 2019-08-17
Handle: RePEc:eee:proeco:v:197:y:2018:i:c:p:35-42