EOQ under Date-terms Supplier Credit: A Near-optimal Solution

This paper shows that under date-terms supplier credit, making explicit the separate effects of carrying cost, the financing and other marginal holding costs, does not invalidate Kingsman's original result that the optimal order quantity is given by an integer multiple of monthly demands, provided the capital investment component of the inventory holding costs is equal to or greater than 30% of the component due to the physical holding of inventory. The analysis is extended to the case when orders of less than a month's demand are optimal. Here it is shown that the order quantity should be an integer fraction of a month's demand, provided that the capital investment component of the inventory holding charge is equal to or greater than one quarter of the component due to the physical holding of inventory. It is argued that these conditions are likely to be satisfied for most if not all practical inventory situations. Combining these results with those of Carlson and Rousseau leads to a simple formula for the general optimal policy. The EOQ can still be expressed as a simple formula, so for practical situations generally there is no need to use the numerical search procedure these authors propose.