Optimal ordering policies for a retailer who offers distinct trade credits to its good and bad credit customers

In practice, to reduce default risks, a retailer frequently offers its bad credit customers a partial trade credit, in which the retailer requests its customers to pay a portion of the purchase amount at the time of placing an order as a collateral deposit, and then grants a permissible delay on the rest of the purchase amount. By contrast, the retailer usually provides a full trade credit to its good credit customers without the collateral deposits. For generality, in this paper, I establish an economic order quantity (EOQ) model for a retailer who receives a full trade credit by its supplier, and offers either a partial or a full trade credit to its customers. The proposed model is in a general framework that includes numerous previous models as special cases. I then analyze the characteristics of the optimal solution, and provide an easy-to-use closed-form optimal solution. Finally, I use a real-world inventory problem to illustrate the proposed model and its optimal solution.