An Economic Order Quantity Model for Nonconforming Quality Products

The inventory literature is replete with claims on business strategy to maximize operational efficiency and customers' goodwill regarding the quality of products. A service system is composed of a number of entities, such as inventory of resources, trade credit financing, and the prediction of the demand and quality of products, among others. Drawing upon relevant research in inventory theory, in light of trade credit financing for uncertain demand of the customers, this study empirically develops a framework of an economic order quantity model for conforming and nonconforming quality products, while the nonconforming items, a random proportionate of the total products, are sold at a reduced price after a 100% screening process. In general, a trade credit policy is offered to the retailer by the supplier to buy more items. In this point of view, different delay periods with different purchasing costs are settled for the retailer. The associated expected average profit for both conforming and nonconforming products by trading off selling prices, inventory costs, interest earned from selling items, interest charged for delayed payments of purchasing cost, and shortage costs is maximized analytically. Numerical examples are illustrated to justify the model. Sensitivity analysis of the key parameters is also carried out for various issues.