OPTIMAL ORDERING POLICIES UNDER CONDITIONS OF EXTENDED PAYMENT PRIVILEGES FOR DETERIORATING ITEMS

Abstract

This paper deals with optimal order quantities for firms, where units in an inventory are subject to deterioration at a constant rate, which are offered a one time opportunity to delay payment for an order of a commodity. Such delayed payment reduces purchase cost which is a function of the return available on alternative investments, the number of units ordered and the length of the extended period. Optimal order quantities are developed for extended payment privileges that occur at a reorder point. Four supplier’s extended payment scenarios are evaluated. An analysis is conducted to determine the sensitivity of derived model to changes in the various input parameters.