Impact of order size on unit-discount and credit-period in inventory system under capacity constraints and partial backorder

Purpose To examine the effect of order-size dependency on all-unit discount and the trade credit period at two levels, and formulate a total combined profit function for the manufacturer and the supplier. Also, to test this model by taking a numerical example and performing a sensitivity analysis to gain managerial insights and results. Design/methodology/approach This work presents an integrated inventory model with a bi-level trade credit period and an all-unit discount dependent on order size under capacity constraints. To address stockouts, this model uses a partial backorder approach. The concavity of the profit function is shown and an algorithm is developed to find the optimal decision policy for the manufacturer and supplier. Findings The supplier places more frequent orders to take benefit of trade credit whenever demand and interest earned rate increase. Joint profit generated by both the manufacturer and supplier grows, even though the manufacturer offers a price discount to the supplier. The supplier should order an amount of inventory that can be accommodated in their own warehouse instead of renting an additional warehouse. Originality/value Till now, as per our best knowledge, there is no existing literature that has simultaneously considered order size-dependent two-level trade credit, capacity constraint, all-unit discount linked to order purchase price and partial backordering. Combining these factors, this paper derives an integrated inventory model to maximize the total combined profit of the manufacturer and supplier. These unique factors set this paper apart from existing literature, providing distinct advantages.