Inventory Policy and Trade Credit Financing

Abstract

It is common business practice to purchase inventory on open account. Consequently, purchased inventory can be considered to be financed in whole or in part with trade credit. This paper investigates the relationship between inventory policy and trade credit policy in the context of the basic lot-size model. It demonstrates that, in general, optimality requires order quantity and payment time decisions determined simultaneously. The conditions under which the standard solutions are optimal are also developed.