Optimal strategy for an integrated system with variable production rate when the freight rate and trade credit are both linked to the order quantity

This paper presents an integrated inventory model with variable production rate and price-sensitive demand rate. The buyer's purchases trade credit linked to the order quantity offered by the supplier. In addition, the buyer pays the freight charge according to a weight schedule. This paper attempts to offer a best policy that aims at maximizing the joint total profit while the trade credit and freight rate are simultaneously linked to the order quantity. The same policy also incorporates considerations on the optimal retail price, order quantity and delivery decision. We provide possible solutions for the buyer and the supplier to collaboratively agree on inventory control, warehouse management, transportation logistics, delivery and billing. Our study demonstrates that significant profit increase for the entire supply chain can be achieved by linking both trade credit policy and freight rate policy to order quantities. An algorithm is furnished to determine the optimal solution. In addition, numerical examples and sensitivity analysis are presented to illustrate the theoretical results. (c) 2008 Elsevier B.V. All rights reserved.