Effect of Future Price Increase for Products with Expiry Dates and Price-Sensitive Demand under Different Payment Policies

Abstract

The current study works with an inventory management strategy under the discount cash flow approach for perishable commodities with expiry dates, price-sensitive demand, and investment in preservation technology. In addition, this study examines the probable influence of price-increase on the replenishment strategy of the retailer where specific delivery units can be purchased. Furthermore, in this model, two circumstances are deliberated: (I) when the time of the specific delivery matches with the reordering time of the retailer or (II) when the time of the specific delivery emerges within the duration of the sale. Before the price increase, the supplier provides two payment policies to the retailer from which they can choose one. The policies are either: (1) a permissible delay in payment on regular orders or (2) a discount in payment for the specific delivery. The key goal is to optimize the overall profit for the retailer with respect to the sales price, investment in preservation technology, and cycle time during the depletion time of the specific delivery. In addition, an algorithm is created to optimize the results and seven numerical illustrations are discussed to explain the results along with the special case. Finally, to display the pertinence of this model, a sensitivity analysis of the main parameters is performed with important managerial implications. The key findings of this research are (1) before the price increase, the retailer gets the maximum profit if the retailer chooses a discount in payment policy on the specific delivery; (2) how much to order from the supplier and when to place a specific delivery to generate a maximum profit; and (3) the price-sensitive demand and assumption of future price increase negatively affect the retailer’s overall profit, and the retailer gets maximum benefits if the retailer initially orders the maximum number of units from the supplier before the price increase.

Keywords

• discount in payment policy
• future price rise
• maximum fixed lifetime
• price-sensitive demand
• preservation technology investment
• trade credit policy