Coordinating vendor-buyer decisions for imperfect quality items considering trade credit and fully backlogged shortages

Supply chain management has become a critical issue for modern business environments. In today’s world of cooperative decision-making, individual decisions in order to reduce inventory costs may not lead to an overall optimal solution. Coordination is necessary among participants of supply chain to achieve better performance. There are legitimate and important efforts from the vendor to enhance the relation with buyer; one such effort is offering trade credit which has been a driver of growth and development of business between them. The cost of financing is a core consideration in effective financial management, in general and in context of business. Also, due to imperfect production a vendor may produce defective items which results in shortages. Motivated with these aspects, an integrated vendor-buyer inventory model is developed for imperfect quality items with allowable shortages; in which the vendor offers credit period to the buyer for payment. The objective is to minimize the total joint annual costs incurred by the vendor and the buyer by using integrated decision making approach. The expected total annual integrated cost is derived and a solution procedure is provided to find the optimal solution. Numerical analysis shows that the integrated model gives an impressive cost reduction, in comparison to independent decision policies by the vendor and the buyer.