Credit policy and inventory control

Credit policies are shown to be important in the basic economic order quantity inventory model. An economic order quantity model is derived which explicitly considers possible credit periods allowed by suppliers. This model is shown to be very sensitive to the length of the credit period, and to the relationship between the credit period and inventory level. It is also shown to be more sensitive to estimates of demand for inventory items and less sensitive to order costs than the basic economic order quantity model. A practical example illustrates this sensitivity, shows how inventory costs may be considerably reduced by taking the existence of a credit period into account, and demonstrates the implications for inventory and credit policies.