A joint model for cash and inventory management for a retailer under

delay in payments
q
Lama Moussawi-Haidar
a,
, Mohamad Y. Jaber
b
a
Olayan School of Business, American University of Beirut, P.O.Box 11-0236, Riad El Solh, Beirut 1107-2020, Lebanon
b
Department of Mechanical and Industrial Engineering, Ryerson University, 350 Victoria Street, Toronto, Ont. M5B2K3, Canada
a r t i c l e i n f o
Article history:
Received 4 April 2012
Received in revised form 13 August 2013
Accepted 21 September 2013
Available online 1 October 2013
Keywords:
Cash management
Lot sizing
Delay in payment
Inventory management
a b s t r a c t
As retail companies continue to navigate through the economy downturn, it becomes critical to nd
innovative cost reduction methods. Cash management is a cost-intensive process for retailers, who are
currently focusing on effective cash management, such as deciding on the maximum cash level to keep
in their business accounts and how much to borrow to nance inventories and pay suppliers. In this
paper, we consider the problem of nding the optimal operational (how much to order and when to
pay the supplier) and nancial decisions (maximum cash level and loan amount) by integrating the cash
management and inventory lot sizing problems. We consider a supplier offering a retailer an interest-free
credit period for settling the payment. Beyond this period, the supplier charges interest on the outstand-
ing balance. Whenever the cash exceeds a certain limit, it will be invested in purchasing nancial secu-
rities. At the time when the retailer pays the supplier for the received order, cash is withdrawn from the
account, incuring various nancial costs. If the cash level becomes zero or not sufcient, the retailer
obtains an asset-based loan at interest. We model this problem as a nonlinear program and propose a
solution procedure for nding the optimal solution. We perform a numerical study to analyze the impact
of optimal cash management on the inventory decisions. The results indicate that the optimal order
quantity decreases as the retailers return on cash increases. We compare our model to a model that
ignores nancial considerations of cash management, and show numerically that our model lowers the
retailers cost. Also, we illustrate the effect of changing various model parameters on the optimal solution
and obtain managerial insights.
2013 Elsevier Ltd. All rights reserved.
1. Introduction
As retail companies continue to navigate through the economy
downturn, it becomes critical to nd innovative cost reduction
methods. Margins are being squeezed from rising input costs and
tough competition among retailers. Superstores are battling each
other on every major corner while direct marketers (including cat-
alogs and online sites) are stealing customers from stores. Online
selling at deep discounts is even making inroads into major con-
sumer purchases. Many retailers have been driven into bankruptcy
recently, including Sharper Image, Linens n Things, Bombay Co.,
and mail order rm Bloomberg (2011). In this challenging environ-
ment, companies need to formulate and execute cost management
initiatives. The game is becoming to change the way money is
spent, as cash plays a dominating role in the retail industry. Cash
management is a cost-intensive process for retail companies, and
offers major potential for improving productivity. Thus, retailers
are currently focusing on effective cash management, such as
deciding on the maximum cash level to keep in their business
accounts, how much cash to invest into nancial securities, how
much to borrow to nance inventories and pay suppliers. In addi-
tion to supply agreements as a cost reduction method, effective
cash management is a foundational element that should be ad-
dressed to help retailers achieve competitive advantage and main-
tain protable growth along the supply chain.
Several papers have addressed the similarities between holding
cash and holding goods (Baumol, 1952; Haley & Higgins, 1973).
Inventory control literature has focused on nding the optimal
inventory policy for one retailer or multiple retailers and have con-
sidered supplier agreements. Cash management literature has fo-
cused on nding the optimal policies for keeping cash in
anticipation of future net expenses. However, there is very limited
research addressing the impact of a retailers cash management on
inventory control decisions.
To meet its day to day transactions requirements, a retailer
keeps cash from sales in a business bank account, which is used
to make new inventory investments and pay suppliers. The
0360-8352/$ - see front matter 2013 Elsevier Ltd. All rights reserved.
http://dx.doi.org/10.1016/j.cie.2013.09.021
q
The manuscript was handled by the area editor Qiuhong Zhao, Ph.D.

Corresponding author. Tel.: +961 1 350000x3766.

E-mail addresses: lm34@aub.edu.lb (L. Moussawi-Haidar), mjaber@ryerson.ca
(M.Y. Jaber).
Computers & Industrial Engineering 66 (2013) 758767
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management of physical inventory and cash inventory are closely
interrelated, and operations and nancial decisions need to be
made simultaneously, contrary to the ModiglianiMiller theory
(Modigliani, Miller, & capital, 1958) in corporate nance which
proves that in perfect and competitive markets, nancing decisions
and investment and production decisions of a rm can be made
independently. Rather, markets are imperfect (due to information
asymmetry, conicts of interest among stockholders and bond-
holders, and so on). A retailers operating decisions about invento-
ries have to take into account the nancial constraints and
elements associated with the nancing and cash management
costs. The problem discussed here is that of nding the optimal
operational and nancial decisions (how much to order and when
to pay the supplier) and optimal cash policy (maximum cash level,
amount to invest into securities, and loan amount) for a retailer in
order to minimize the total inventory and cash management costs.
This is done by integrating cash management into the traditional
lot sizing inventory model of a two level supply chain.
A rm can increase its cash level by making cash deposits or
raising new capital, and can decrease the cash balance by with-
drawing cash, paying dividends, or investing in earning assets.
Adjusting the cash balance in either case will incur transactions
costs. An incentive to keep the cash balance low is due to the fact
that each unit of positive inventory leads to holding cost since cash
has other uses like being invested in earning assets. On the other
hand, if the cash balance is negative, penalty cost is incurred as a
result of not meeting the demand for cash, and a loan is needed
to cover the expenses. The objective for a rm is to keep the aver-
age cash level small, but not to borrow that often. The cash man-
agement problem involves determining an optimal policy for the
cash balance, when and how much to shift from securities to cash
and from cash to securities, and how much to borrow. What com-
plicates the problem is the stochastic inows and outows of cash.
This problem is widely encountered by retailers and manufactur-
ers. Research that addresses this problem includes Girgis (1968),
Eppen and Fama (1969), and Heyman (1973). In this paper, a retai-
ler faces the following cash management problem: How much cash
does a retailer need to keep each period, and how much to borrow,
while minimizing cash holding costs, transactions costs, and bor-
rowing costs?
In the vast literature on lot sizing in inventory control, research-
ers assume that there is sufcient capital available to its nancing,
which might apply for large rms that have the ability to fund
inventory. However, start-up and fast-growing companies are cap-
ital constrained and face a challenge in nancing their operations.
As a result, they either have to order less than their economic order
quantity, or they resort to external funding to nance their opera-
tions and invest in their inventories. For large rms, the xed as-
sets like equipment and machinery serve as security on loans.
However, small rms do not necessarily have many xed assets,
so they put up equipment, inventory, accounts receivables, and
other liquid assets in exchange for the loan. This is known as as-
set-based lending, which is becoming popular for high growth
companies that do not have credit ratings, according to a recent
article (Wall Street Journal, 2011). The US asset-based lending
grew by 8.3% in 2008, and approached $ 600 billion in total loans
outstanding (Commercial Financial Association, 2009) and is still
dominated by Wall Street biggest rms (Wall Street Journal, 2011).
We consider a supplier offering a retailer an interest-free credit
period for settling the payment. Beyond this period, the supplier
charges interest on the outstanding balance. In this sense, our paper
is the closest to Jaber and Osman (2006), who assume delay in pay-
ment as the coordination mechanism between the supplier and the
retailer. In this paper, the retailer accumulates cash from sales over
the credit period in a business bank account. Whenever the cash ex-
ceeds a certain limit, this cash will be invested in purchasing nan-
cial securities. At the time when the retailer pays the supplier for the
received order, cash is withdrawn from the account, incuring vari-
ous nancial costs. If the cash level becomes negative or is not suf-
cient, the retailer will have to obtain an asset-based loan at an
interest. We build a model that integrates and solves two interre-
lated problems faced by a retailer, cash management and lot sizing
inventory problems. We analyze the impact of optimal cash man-
agement on the total costs and inventory decisions. We perform
numerical analysis to illustrate the results and study the effects of
changing various model parameters on the optimal solution.
The main contribution of our paper is that it investigates the
interdependency of nancial (maximum cash level and how much
to borrow) and operational decisions (how much to order and pay-
ment time) faced by a retailer under permissible delay in pay-
ments. It is the rst paper, to our knowledge, that considers cash
management jointly with inventory management. Our model
incorporates both cash related costs (costs of going in and out of
securities, opportunity cost of cash, bank borrowing costs, and
transaction costs for loan repayment) and inventory related costs,
and analyzes the impact of optimal cash management on the total
inventory costs and decisions. While the inventory problem faced
by a retailer has been mostly solved in the literature in isolation
of the retailers nancial capability, it is very important that future
research tackle the interactions of inventory decisions and nan-
cial considerations and the cash position of the retailer. In the vast
literature on lot sizing and inventory control, researchers have as-
sumed that there is sufcient capital available to its nancing.
However, this might not always be the case, as many companies
are capital constrained and face a challenge in nancing their oper-
ations. Such a constraint has a direct impact on the inventory
ordering decisions. Under such a constraint, the inventory problem
becomes much more complex.
2. Literature review
There is substantial literature on each of inventory and cash
management decision making. However, there is little exploration
of the relationship among these two.
The problems of determining inventory control policies ignor-
ing nancial constraints, under both deterministic and stochastic
settings, have been studied extensively. Under a deterministic de-
mand, the well known Economic Order Quantity (EOQ) model with
its extensions (quantity discounts, deterioration rate, imperfect
quality items, nite production rate, etc.) have been investigated
extensively in the literature. When demand is stochastic, models
with (s, S) and (Q, r) policies have been studied. Almost all of these
models have assumed that it is always possible to secure funds and
follow the optimal production plan.
Many articles have been published related to the lot sizing
inventory problem faced by a retailer when he is offered a permis-
sible delay in payments by the supplier. In these models, the sup-
plier allows a certain xed period to settle the account. During this
xed period, no interest is charged by the supplier, but beyond this
period, interest is charged under the terms agreed upon, and inter-
est is earned on the revenue from sales received during the credit
period. Haley and Higgins (1973) consider a lot-sizing problem
faced by a retailer under trade credit nancing. The decision in
their model is to jointly determine the optimal order quantity
and optimal payment time for the retailer. They develop the cost
function to be minimized under two cases: the rst case is when
the payment time is smaller than the cycle time and the second
case is when the payment time is larger. They state that generaliz-
ing their model to include utilizing surplus funds and bank
borrowing would be quite laborious. Goyal (1985) analyzes the
same problem but assumes that the interest rate for credit surplus
L. Moussawi-Haidar, M.Y. Jaber / Computers & Industrial Engineering 66 (2013) 758767 759
is different than that of credit decit. Aggarwal and Jaggi (1995)
study the problem of determining the optimal order quantity of
deteriorating items for a retailer under permissible delay in pay-
ments using the optimal control approach. Abad and Jaggi (2003)
assume that demand is price sensitive and consider the retailers
problem of determining the optimal unit price and length of the
credit period. Other papers that analyze the lot-sizing problem un-
der permissible delay in payments include Chu, Chung, and Lan
(1998), Bregman (1992) and Jamal, Sarkar, and Wang (1997, 2000).
In a supply chain setting, issues of coordinating the material and
information ows across the supply chain have been considered.
Still, the issue of coordinating material and nancial ows in the
presence of nancial constraints is largely ignored. For example,
Jaber and Osman (2006) consider a centralized two-level supply
chain model with permissible delay in payments. They show that
with coordination, the retailer orders in large quantities than his
economic order quantity, with savings to either both players or to
the entire supply chain. The above mentioned literature assumes
that demand is deterministic. Skouri, Konstantarasa, Papachristos,
and Teng (2011) consider a supply chain inventory model with
deteriorating items and ramp type demand under permissible delay
in payments. Recent work on stochastic demand is for Gupta and
Wang (2009) who consider a stochastic inventory model for a retai-
ler with trade credit and derive the optimal policy. Glock, Ries, and
Schwindl (2013a, 2013b) nd the optimal ordering policy for a re-
tailer with stock-dependent demand and a supplier offering a pro-
gressive payment scheme to the retailer. Our paper is similar to the
above works in that it considers a lot sizing inventory model with
permissible delay in payments. However, all of these works ignore
the nancial costs associated with the retailer managing his cash
ow, which is the main contribution of our model.
A few papers have attempted to incorporate nancial consider-
ations into production and inventory decisions. Buzacott and
Zhang (2004) incorporate asset-based lending into production
decisions. They show that inventory is linked to a rms assets
and liabilities, and study a stackelberg game between a retailer
and a bank. The retailer decides on how much to borrow within
the loan limit specied by the bank, and how much to order. The
bank decides on the interest rate to charge the retailers. Several pa-
pers build on Buzacott and Zhang (2004). For example, Dada and
Hu (2008) consider a capital-constrained newsvendor problem in
which the newsvendor orders less than the optimal quantity, thus
he needs to decide on how much to borrow at a given interest rate
to nance additional procurement. The interaction between the
bank and the newsvendor is represented as a stackelberg game.
Hu and Sobel (2005) examine the interdependence of a rms cap-
ital structure and its operating decisions in a dynamic newsvendor
setting, with the objective being to maximize the present value of
dividends. Also, Raghavan and Mishra (2009) consider a retailer
and a manufacturer both approaching a lender for loan. They solve
the lenders problem of determining the loan size of each by max-
imizing the lenders prot. Lee and Rhee (2010) study the impact of
nancing costs on different supply chain contracts. They show that
using trade credit in addition to the contracts, the supplier fully
coordinates the supply chain. Milne (1996) shows that, for a nan-
cially constrained rm, the optimal policy for cash holdings which
is modelled as a stochastic process, is to take no action when cash
holdings are less than threshold levels. These levels are functions
of the current levels of inventory. On the boundaries, additional
cash is used for inventory replenishment or for dividend payments.
Chao, Chen, and Wang (2008) consider a dynamic inventory con-
trol problem of a self-nancing retailer. In their model, the replen-
ishment decisions are constrained by cash ow constraints which
state that the cost of the amount ordered should be less than the
retailers capital level. They derive the optimal inventory policy
and present an algorithm to compute the optimal policy.
On the other hand, cash management models in corporate -
nance literature are extensive. This literature has started with Bau-
mol (1952) who, under simplied assumptions, study the cash
balance problem using inventory theory and derive an optimal
cash balance level which is equivalent to the optimal lot size for-
mula in inventory control. Tobin (1956) presents a model that bal-
ances the yield of investing cash into securities versus the cost of
transactions and illustrates when and how much to shift from
transactions balances in assets into cash and vice versa. Robichek,
Teichroew, and Jones (1965) formulate the cash balance problem
as a linear program model to determine the optimal way for a rm
to meet its cash needs (whether to take a loan and in what
amount), with the objective being to minimize the costs related
to the sources of cash. Eppen and Fama (1971) study a stochastic
cash balance problem, in which the objective is to minimize cash
holding and penalty costs in addition to the transfer costs. Heyman
(1973) also considers a stochastic cash balance problem and for-
mulate a multi-period model that minimizes the expected average
cash balance subject to a constraint on the probability of stockouts.
The cash balance process changes according to three random
events: (1) nancial, such as stock issue, (2) calendar, which are
scheduled nonrandom payments such as dividend payments, and
(3) random events. The optimal policy is derived and can be ex-
pressed as never have any more cash than is necessary to satisfy
the constraint. Xu et al. (2004) analyze the interactions between a
rms production and nancing decisions as a tradeoff between the
taxes benets of debt and nancial distress costs. They show that
all-equity manufacturing rm can improve its performance by
making production and nancial decisions together. Xu and Birge
(2006) propose a corporate planning model that allows simulta-
neous nancial and operational decisions to be made. They formu-
late and solve an integer stochastic programming model, with the
objective being to maximize the equity value of a rm to derive the
optimal cash management and dividend policies. Other papers
such as Kallberg, White, and Ziemba (1982) formulate and solve
the cash balance problem as a mathematical program, or Babich
and Sobel (2007) who formulate the problem as a stopping time
innite horizon Markov decision process.
The remainder of the paper is as follows: Section 3 formulates
the model under six different cases. A solution procedure for
solving the resulting non-linear program is presented in Sub Sec-
tion 3.1. Numerical analysis to analyze the impact of optimal cash
management on the total cost and inventory decisions is presented
in Section 4. A conclusion is provided in Section 5.
3. Modeling the effect of retailers cash management on lot
sizing inventory decisions
In this section, we describe and model the well known cash
management problem integrated with the lot sizing problem faced
by the retailer. We consider a retailer who orders Q units from a
supplier, at a unit cost c and ordering cost A. The supplier offers
the retailer an interest-free permissible delay in payments equal
to M units of time after receiving the shipment. After M, the sup-
plier charges interest on the outstanding balance. The suppliers
rationale is to entice the retailer to place larger order quantity than
the retailers economic order quantity. The retailer deposits the
day-to-day sales in the bank in the form of cash. The cash level
in the retailers account uctuates with the day to day cash inows
and outows which are stochastic in nature. To pay the supplier for
the inventory investments, the retailer withdraws cash from his
bank account, whenever the cash balance is positive. According
to Haley and Higgins (1973), the retailers optimal strategy is to
accumulate funds in cash for a time and make a lump-sum pur-
chase of securities. This is the cash management problem: cash
760 L. Moussawi-Haidar, M.Y. Jaber / Computers & Industrial Engineering 66 (2013) 758767
comes in continuously and must be stored, either in cash or secu-
rities, in anticipation of a payment at
^
t. Thus, the retailer accumu-
lates cash up to a maximum level, C. When this level is reached, the
total accumulated cash will be invested in the money market,
incurring a transactions cost of purchasing securities (Heyman,
1973). Each unit of positive cash incurs a holding cost, which is
the opportunity cost of funds left in cash, since cash can be used
to pay out dividends or as investments in earning assets. On the
other hand, if the cash balance becomes zero, the retailer borrows
money from the bank at a borrowing cost of i% to nance his inven-
tory investment and pay the supplier.
The retailer has to decide on the order quantity per period,
given the interest-free permissible delay in payment, M, set by
the supplier. In addition, the retailer needs to decide on the
payment time,
^
t, the maximum level of cash to accumulate in his
bank account, C, and the loan amount needed to nance his
inventory investment. To proceed, we dene the following
variables:
D Demand rate per unit time.
A Retailers order cost per period.
h Holding cost per unit time, excluding storage
cost and nancing charges.
s Storage cost per unit time.
c Retailers cost per item.
p Retailers selling price per item.
r% Return on invested cash.
r
s
% Interest charged by the supplier.
i% Cost of nancing the inventory (Borrowing cost).
M Permissible delay in payment (interest-free period).
^
t
Retailers payment time (decision variable).
Q Retailers order quantity (decision variable).
t = cQ/
pD
Time by which the retailer accumulates cQ in his
bank account.
T = Q/D Inventory cycle time.
C Maximum level of cash (decision variable).
Before
^
t, the retailer enjoys a trade credit surplus due to the
sales proceeds that accumulate in the bank as cash in anticipation
for a payment at time
^
t. The retailer will then use up his cash bal-
ance to pay the supplier at time
^
t. If at any time over a cycle, the
cash level exceeds the maximum level C, the accumulated cash will
be used to purchase nancial securities, at a cost of b per transac-
tion. At any point in time, the retailer can go in and out of securi-
ties, i.e. can transfer cash into securities and vice versa. If at time
^
t
there is a credit decit, i.e if the cash balance is zero or negative,
the retailer borrows money from the bank to pay the supplier,
and repays an amount L per period, at a cost of i%. Thus, we add
the following notation to the above listed:
b Transactions cost of going in and out of securities.
L Amount of loan repaid per period.
f Transactions cost per each loan repayment.
The retailers total cost consists of the following cost expres-
sions: Purchasing and ordering cost, storage cost, holding cost,
interest paid to the supplier, transactions costs of going in and
out of securities, opportunity cost of funds left in cash, transactions
cost of making a loan repayment, and bank borrowing cost. The
retailer can invest the surplus funds at a return rate r and earn
interest, resulting in a capital gain per cycle (a negative cost),
which will be deducted from the retailers total cost function.
The purchasing and ordering cost function per cycle is simply
cQ + A, and the storage cost per cycle is (sQ/2)T = sQ
2
/2D. To
compute the capital gain, holding, transactions, borrowing, and
opportunity cost expressions, we consider several cases depending
on whether the credit free period M is smaller or larger than the
cycle time T, and when the payment occurs.
Case I: M 6 T 6
^
t. In this case, the retailer always has surplus
funds due to the sales proceeds and does not need to borrow.
The retailer accumulates in his bank account cQ by time t = cQ/
pD, and settles its account with the supplier by time
^
t, where
M 6 T 6
^
t. Note that cQ < pDT. Fig. 1 illustrates the behavior of cash
inventory over time (excluding capital gains). The retailer enjoys
an interest-free credit period of length M and is charged interest
on the outstanding balance for a period of length
^
t M. As in Jaber
and Osman (2006), there is a capital gain on the side of the retailer
as he/she can invest the outstanding balance at the return on
investment r. Thus, letting r
s
be the interest charged by the sup-
plier per unit time, the compounded interest paid to the supplier
will be cQe
rs
^
tM
1. When the retailer settles his account at time
^
t, his inventory level will be 0 and the holding cost will only consist
of the storage cost. Referring to Fig. 1, the capital gain when
M 6 T 6
^
t, is computed as
Capital gain per cycle pDT
1
2
pDTe
rT
1
_ _
e
r
^
tT
cQe
rs
^
tM
1: 1
Since the yearly interest has small value and is compounded daily
or weekly, using Taylors series approximation, it is reasonable to
assume that e
rt
1 rt. Thus, Eq. (1) can be written as
Capital gain per cycle pDT
1
2
prDT
2
_ _
1 r
^
t T
r
s
cQ
^
t M: 2
We note that capital gains are computed per cycle and do not accu-
mulate over time.
We assume that cash accumulated from daily sales can be rein-
vested at a return on investment rate r, or paid out as dividends,
thus, incurring an opportunity cost of funds left in cash which is
equal to rC/2, the interest rate multiplied by the average cash. In
this case, there are no borrowing costs and only the transactions
cost due to transferring cash into nancial securities are relevant.
This transactions cost is computed as follows:
Transactions cost b number of transactions
b Dollar cash per cycle=Maximum cash
level per cycle b
pQ
C
:
Finally, the total retailers cost function per cycle, C
I
Q;
^
t; C can be
expressed as the summation of the purchasing and ordering cost,
storage cost, holding cost, transactions cost, opportunity cost of
funds, less the capital gain and is expressed as follows:
Fig. 1. Behavior of the cash inventory level when M 6 T 6
^
t.
L. Moussawi-Haidar, M.Y. Jaber / Computers & Industrial Engineering 66 (2013) 758767 761
C
I
Q;
^
t; C cQ A sQ=2T bpQ=C rC=2
pDT
1
2
prDT
2
_ _
1 r
^
t T r
s
cQ
^
t M
_ _
:
3
The total retailers cost per unit time is obtained by dividing (3) by
the cycle time T, so we get
C
u
I
Q;
^
t; C cD AD=Q sQ=2 bpD=C rCD=2Q
pD
1
2
prQ
_ _
1 r
^
t
Q
D
_ _ _ _
r
s
cD
^
t M
_ _
:
4
The cost function C
u
I
Q;
^
t; C in (4) is convex with respect to Q and C,
since @
2
C
u
I
=@Q
2
2AD rCD=Q
3
pr
2
=D > 0 and @
2
C
u
I
=@C
2

2bpD=C
3
> 0. Note that since the retailer has the option to make
his payment anytime after the credit period (
^
t PT PM), the retai-
ler might choose to delay his payment indenitely. To avoid this
situation, we add a constraint that sets an upper bound on the retai-
lers payment time to the supplier. In our numerical examples, we
set this upper bound to be 2 M, that is, the retailer can delay the
payment at most till time 2M. Thus, we get the constraint
^
t 6 2M.
The optimal values for Q;
^
t, and C are obtained by solving the fol-
lowing nonlinear program:
Min C
u
I
Q;
^
t; C
s:t: M 6 T 6
^
t;
^
t 6 2M and Q P1:
5
Clearly, from (4), the optimal payment time should be equal to the
upper bound, i.e.
^
t 2M.
Example: Consider the following parameters: Annual demand
D = 150,000 units, unit cost c = $20, selling price p = $30, order cost
A = $30, holding cost h = $6, storage cost s = $3, credit period
M = 20 days, return on investment r = 10%, suppliers cost of money
r
s
= 15%, and transactions cost b = $3 per transaction. Then, solving
the nonlinear program in (5), the optimal solution is C

= $73484.1,
Q

= 8219.18 units,
^
t 40 days (equal to the upper bound on
^
t),
and the optimal daily cost is $8225.3. We note that the nonlinear
program for Case I and the other cases in this paper were solved
using Excel Solver.
Case II: M
^
t 6 T and t < M. The retailer accumulates in the
bank account cQ by time t = cQ/pD where t < M. In this case, the re-
tailer settles his account with the supplier by time M, so
^
t M.
Fig. 2 illustrates the behavior of cash inventory over time (exclud-
ing capital gains). First, we nd the capital gain, then we compute
the nancial and holding costs.
The capital gain is computed as
Capital gain per cycle
1
2
pDMe
rM
1e
rTM
pD
T M
2
cQ
_ _
e
rTM
1

1
2
pDMe
rT
e
rTM

pD
T M
2
cQ
_ _
e
rTM
1: 6
Eq. (6) is to be deducted from the retailers total cost function and
can be written as
Capital gain per cycle
1
2
prDM
2
pD
T M
2
cQ
_ _
rT M:
7
In this case, no borrowing is necessary. We next look at the securi-
ties investment, and perform a similar analysis to that of Case I. The
cash generated from sales in 0;
^
t is deposited in the bank and no
payment to the supplier is made. Whenever the cash level exceeds
the maximumcash level, C, it is transferred into securities, incurring
a cost per transaction of going into securities equal to b. Thus, in
0;
^
t, the average cash balance per cycle is C/2. The transactions cost
of securities investment per cycle is b (Dollar Cash per cycle/
C) = b (pQ/C). Per unit time, this transactions cost expression
becomes
Transactions cost for securities investment per unit time
b pQ=C
^
t=T b p
^
tD=C:
8
Also, there is an opportunity cost of the funds left in cash in the re-
tailers account. The opportunity cost of funds per unit time is
Opportunity cost of funds per unit time r C=2
^
t=T: 9
At time
^
t;
^
t > t, cash from sales is used up to pay the supplier, and
the cash balance reduces to 0. To compute the holding cost, we refer
to Fig. 3A which illustrates the inventory level over time. When the
retailer pays the supplier, the inventory level is Q DM. In 0;
^
t, the
retailer incurs no cost of capital. In
^
t; T, the retailer owns the
inventory and thus incurs a cost of capital which we account for.
The holding cost per cycle can be computed by multiplying h by
the shaded area. Thus we have
Holding cost per cycle h T MQ DM=2
h Q DM
2
=2D
Holding cost per unit time h T MQ DM=2 1=T
h Q DM
2
=2Q: 10
Using (7)(10), the retailers total cost per unit for this case
becomes
C
u
II
Q;
^
t; C cD AD=Q sQ=2 h Q DM
2
=2Q
r CD
^
t=2Q b p
^
tD=C
1
2
prD
2
M
2
=Q
cD
pD
2
1
DM
Q
_ _ _ _
rQ=D M:
Thus, we get @
2
C
u
II
=@Q
2
2AD hD
2
M
2
rCD
^
t=Q
3
> 0. Also,
@
2
C
u
II
=@C
2
2bpD
^
t=C
3
> 0, thus the cost function C
u
II
Q;
^
t; C above
is convex with respect to Q and C. The optimal order quantity,
payment time, and maximum cash level are obtained by solving
the following nonlinear program:
Min C
u
II
Q;
^
t; C
s:t: M 6 T;
^
t M; t < M and Q P1:
11
Consider the same parameters as in the numerical example pre-
sented in Case I. Solving the problem in (11), the optimal solution
is C

= $60,000, Q

= 8219.18 units, and the optimal daily cost is

$8237.1.
Case III:
^
t M 6 T and t = M. When M = t, the retailer accumu-
lates in the bank account cQ by time t = cQ/pD = M where M6 T.
In this case, the retailer also settles his account with the supplier
by time M, so
^
t M. Fig. 4 illustrates the behavior of cash inventory
Fig. 2. Behavior of the cash inventory level when M
^
t 6 T and t < M(Case II).
762 L. Moussawi-Haidar, M.Y. Jaber / Computers & Industrial Engineering 66 (2013) 758767
over time. The holding and nancial costs are the same as in Case
II. The capital gain is computed as
1
2
cQe
rM
1e
rTM

1
2
pDT Me
rTM
1

1
2
cQe
rT
e
rTM

1
2
pDT Me
rTM
1 12
Eq. (12) is to be deducted from the retailers total cost function. Eq.
(12) can be written as
1
2
rcQM
1
2
rpDT M
2
or
1
2
rpDM
2

1
2
rpDT M
2
: 13
The retailers total cost per unit for this case becomes
C
u
III
Q;
^
t; C; L cD sQ=2 AD=Q h Q DM
2
=2Q
r CD
^
t=2Q b p
^
tD=C

1
2
rcDM
1
2
rpD
2
T M
2
=Q
_ _
: 14
Under the condition that h Ppr, the cost function above is convex
in Q @
2
C
u
III
=@Q
2
2AD D
2
M
2
h pr rCD
^
t=Q
3
> 0
_ _
. The con-
vexity in C is shown similarly to the previous cases. The optimal
decision variables can be obtained by solving the following nonlin-
ear program:
Min C
u
III
Q;
^
t; C
s:t: M 6 T;
^
t M; t
^
t and Q P1:
15
Solving the same example considered earlier, we get the following
solution: C

= $73516.5, Q

= 12328.76 units and the optimal daily

cost is $8275.6.
Case IV: M <
^
t 6 T and
^
t t.
In this case, the retailer settles his account with the supplier as
soon as cash from selling the amount cQ is available, i.e. t
^
t, but
incurs a penalty by the supplier who charges interest on the
outstanding balance over the period
^
t M. Thus, the retailer incurs
a penalty cost for making a late payment. Fig. 5 illustrates the
behavior of cash inventory over time. The capital gain per cycle
is computed as
1
2
cQe
rt
1e
rTt

1
2
pDT te
rTt
1 cQe
rs tM
1

1
2
cQe
rT
e
rTt

1
2
pDT te
rTt
1 cQe
rs tM
1
16
Eq. (16) is to be deducted from the retailers total cost function and
can be written as
1
2
rcQt
1
2
rpDT t
2
r
s
cQt M or
1
2
rpDt
2

1
2
rpDT t
2
r
s
cQt M:
From Fig. 3B, the holding cost per cycle is
Holding cost per cycle h T
^
tQ D
^
t=2
h Q D
^
t
2
=2D
Holding cost per unit time h T
^
tQ D
^
t=2 1=T
h Q D
^
t
2
=2Q:
The optimal decision variables are obtained by minimizing the fol-
lowing cost function subject to the constraints M <
^
t 6 T;
^
t t and
Q P1. This function can be easily shown to be convex in Q and C
when h Ppr @
2
C
u
IV
=@Q
2
2AD D
2
t
2
h pr rCD
^
t=Q
3
> 0
_ _
.
C
u
IV
Q;
^
t; C cD sQ=2 AD=Q h Q D
^
t
2
=2Q
r CD
^
t=2Q b p
^
tD=C

1
2
rcDt
1
2
rpD
2
T t
2
=Q r
s
cDt M
_ _
: 17
Inventory
level
Time Time
Inventory
level
(A) (B)
Fig. 3. Computing the holding cost.
Fig. 4. Behavior of the cash inventory level when
^
t M 6 T and t = M (Case III). Fig. 5. Behavior of the cash inventory when M <
^
t 6 T and
^
t t (Case IV).
L. Moussawi-Haidar, M.Y. Jaber / Computers & Industrial Engineering 66 (2013) 758767 763
Solving the numerical example already presented results in the fol-
lowing optimal solution: C

= $75299.55, Q

= 12945.20 units and

the optimal cost is $8300.4.
Case V: M
^
t < T and t > M.
In this case, the retailer settles his account right by the end of
the credit period (i.e.
^
t M), but before accumulating cQ in his
bank account (i.e.
^
t > t). Thus, the retailer nances his payment
by borrowing from the bank. The capital gain for this case is similar
to that of Case III. The bank borrowing costs consist of the nancial
borrowing cost (interest rate of a loan) and transactions cost of
making a loan repayment each period. To nance the inventory,
the retailer borrows at rate i% and repays an amount L per period.
Thus, over
^
t; T, the average balance per cycle of the amount bor-
rowed is L/2. Per unit time, this becomes L=2 T
^
t=T. The bor-
rowing cost per unit time is obtained as
Borrowing cost per unit time i
L
2

T
^
t
T
i
L
2

Q D
^
t
Q
:
To compute the transactions cost from loan repayment each period,
we rst nd the maximumloan amount needed per period, which is
equal to the order cost, cQ, less the cash available from sales at
^
t.
Thus, the maximumloan amount per period is cQ pD
^
t. Let f in dol-
lars, be the transactions cost per each loan repayment. Then, the
transactions cost from loan repayment per unit time is as follows:
Transactions cost for loan repayment per unit time
f Number of transactions
f maximum loan amount per unit time=L
f
cQ pD
^
t
L

1
T
f
DcQ pD
^
t
QL
:
We note that the amount of the loan to be repaid per period is a
decision variable to be determined. The total cost per unit time is
C
u
V
Q;
^
t; C; L cD sQ=2 AD=Q h Q D
^
t
2
=2Q
r CD
^
t=2Q b p
^
tD=C i
L
2

Q D
^
t
Q
f
DcQ pD
^
t
QL

1
2
rpD
2
M
2
=Q
1
2
rpD
2
Q=D M
2
=Q
_ _
: 18
Taking the partial derivative of (18) with respect to L, we get a local
minimum for the amount of loan repayment per period, L

2fcD=i
_
. The optimal solution is obatined by solving the nonlinear
program consisting of minimizing the cost function in (18) subject
to M
^
t < T; t > M, and Q P1. Assuming that the borrowing cost
is i = 12% and transaction cost of borrowing f = $4 per transaction,
we solve the previous numerical example. We get the following
optimal solution: C

= $71,624, Q

= 11712.3, L

= $14,142, and the

optimal daily cost is $8304.5.
Case VI: T 6 M 6
^
t. The supplier offers the retailer a credit period
M that goes beyond the cycle time T. The retailer settles his account
after the credit period. In this case, the holding cost is 0 at time
^
t,
and the capital gain is the same as that of Case I, i.e.
pDT
1
2
prDT
2
_ _
1 r
^
t T r
s
cQ
^
t M. No borrowing is nec-
essary since the payment occurs after the sale of the order quantity.
Similarly to Case I, the retailer can delay the payment indenitely.
To avoid this situation, we add the constraint
^
t 6 2M. The nonlinear
program to solve is to minimize the cost function in (4) subject to
T 6 M 6
^
t,
^
t 6 2M, and Q P1. The solution to the numerical exam-
ple in this case is: C

$21439:9; Q

1049:5;
^
t 2M 40 days,
and optimal cost is $8178.6, which appears in bold in Table 1 to
indicate optimal policy.
As a result, the total retailers cost per unit time C
u
Q;
^
t; C; L is
the summation of the purchasing and ordering cost per unit time,
holding cost per unit time, opportunity cost of funds left in cash in
the retailers bank account, transactions cost for securities invest-
ment, borrowing cost when a loan is obtained, penalty charged
by the supplier when making a late payment, and transactions cost
for loan repayment, less the retailers capital gain. Hence, we write:
C
u
Q;
^
t; C; L
C
u
I
Q;
^
t; C; if M 6 T 6
^
t;
C
u
II
Q;
^
t; C; if M
^
t 6 T and t < M;
C
u
III
Q;
^
t; C; if M
^
t 6 T and t M;
C
u
IV
Q;
^
t; C; if M <
^
t 6 T and t
^
t;
C
u
V
Q;
^
t; C; L; if M
^
t 6 T and t > M;
C
u
VI
Q;
^
t; C; if T 6 M 6
^
t:
_

_
_

_
19
3.1. Solution procedure
Although we are unable to provide a closed-form solution for
the optimal order quantity in each case of problem (19) due to
the complexity of the cost function in each case, we can present
its numerical solution through the following optimization method.
Step1. For eachcase, solve the nonlinear programming problemby
using a non-linear program search method such as gradient
search. Then, for eachcase, determinetheoptimal quantity, Q, cash
level, C, and payment time
^
t, and the optimal cost per unit time.
Step 2. Determine the optimal solution to the problem by com-
paring the minimum expected costs of all cases, C
u
I
Q
1
;
^
t
1
; C
1
;
C
u
II
Q
2
;
^
t
2
; C
2
; . . . ; C
u
VI
Q
6
;
^
t
6
; C
6
, where Q
i
;
^
t
i
and C
i
are the opti-
mal values for case i, i = 1, . . . , 6. The optimal solution of the
problem corresponds to the lowest on the list, with associated
optimal order quantity, Q

, payment time,
^
t

, and cash level,

C

and optimal cost C

u
Q

;
^
t

; C

.
Applying the solution procedure described above to our numer-
ical example, we observe that the lowest cost among all the cases is
$8178.6, which corresponds to Case VI. Thus, the optimal solution
for the given problem parameters is to order 1049.5 units, pay on
day 40, and keep a maximum level of cash equal to $21439.9. This
solution makes sense since a delay in paying the supplier implies
more cash in hand for the retailer to use.
4. Numerical analysis
In this section, we develop numerical results to study the inter-
dependency between nancial and operational decisions, analyze
the sensitivity of our model to various model parameters, and pro-
vide managerial insights. Consider the parameters of the numerical
examples presented in Section 3, i.e. D = 150,000, c = $20, p = $30,
A = $30, h = $6, s = $3, M = 20 days, r = 10%, r
s
= 15%, b = $3, i = 12%,
and f = $4.
4.1. Finding the optimal solution
We rst demonstrate how the optimal solution can be obtained
using the solution procedure presented in Section 3.1. We solve our
problem using the base case parameters, for each of the six cases.
The results are presented in Table 1 below.
Thus, for the chosen model parameters, the optimal solution is
Q

= 1049.5 units,
^
t 40 days, and C

= $21439.9. The optimal daily

cost is $8178.6. This optimal solution corresponds to Case VI, i.e.
764 L. Moussawi-Haidar, M.Y. Jaber / Computers & Industrial Engineering 66 (2013) 758767
when the credit period exceeds the cycle time. This is the most
favorable case for the retailer because the retailer has more cash
to operate with and plough back into the business before a pay-
ment is made. The large order quantities in the other cases are
due to the constraint in each case that forces a lower bound on
the order quantity. For example, consider case IV, which corre-
sponds to the constraint M <
^
t < T and t
^
t. Since T = Q/
D > = M, we get Q/D > = 20 which implies that Q > = 8219.18 units.
Also, we have t = cQ/pD > M, which gives Q > 12328.8. Thus, as
the length of the credit period M decreases, we expect the order
quantities in each case to be smaller.
4.2. Signicance of the model
In our paper, the following cash management strategy is
adopted: Accumulate funds in cash up to a certain level, at which
a lump-sum purchase of securities is made. As a result, our model
accounts for the costs associated with transferring money into secu-
rities and the opportunity cost of the funds in cash. We will compare
our model to another model that ignores cash management. This
new model assumes that cash accumulates in the bank with no
strategy for managing cash. A cash withdrawal occurs whenever a
payment to the supplier is due. In this newmodel, the only relevant
costs are the purchasing, ordering, and holding costs, in addition to
the forgone prot from securities investment (no cash investment)
and the opportunity cost of the funds in cash (which is no longer C
but pQ per cycle). The capital gain is computed as before and is de-
ducted from the cost function. To illustrate, we develop the cost
expression, ignoring cash management considerations, for case VI,
which was found to be optimal in our numerical example.
The cash generated per cycle is pQ which is no longer invested
into securities. Thus, the prot fromsecurities investment per cycle
is rpQ, which becomes a cost to account for in the new model. The
average cash per cycle is equal to pQ/2, therefore, the opportunity
cost of funds in cash is rpQ/2. The transfer costs are no longer rele-
vant, thus, the cost per unit timefor case VI canbe writtenas follows:
cD AD=Q sQ=2 rpD rpD=2
pD
1
2
prQ
_ _
1 r
^
t
Q
D
_ _ _ _
r
s
cD
^
t M
_ _
:
Solving for the optimal order quantity and optimal time, we get
Q

= 1001.6 units (smaller than the optimal solution of our cash

management model) and optimal cost is $8184.7 (larger than in
our model). This implies the signicance of our paper: We are pro-
posing a model that manages the retailers cash. This new model re-
duces the retailers cost. In our example, the cash management
model increases the order quantity and reduces the cost in compar-
ison to the model that completely ignores the nancial consider-
ations of cash management. We also compare the performance of
the cash management model for the other cases. The results indi-
cate that there is a reduction in cost for the same order quantity
when the retailer manages his cash.
4.3. Loan or penalty? Comparing the borrowing cost and suppliers
penalty
Consider a nancially-constrained retailer and a strong supplier
who imposes unfavorable credit terms, for example, a credit period
that ends before enough cash is available to make a payment (i.e.
M < t). The retailer will then face the issue of nancing his inven-
tory. Two options are possible: Either the retailer will pay at time
M by borrowing a loan and thus incurring a cost of borrowing (i.e.
case V), or he will delay the payment until cash from sales is avail-
able, thus, incurring a penalty to the supplier for late payment (i.e.
case IV). To answer this issue, we need to compare with the sup-
pliers penalty r
s
and the cost of borrowing a loan, represented in
the interest on loan i and the transaction cost of borrowing f.
Numerically, we consider the base case parameters, i.e. M = 20,
r = 10%, i = 12% and f = $4. First, we assume that the supplier pen-
alty is r
s
= 5%. We solve cases IV and V. The lowest cost corresponds
to case IV with the following optimal solution: Q

12945:2; C

$75299:6;
^
t 21, and optimal cost = $8291.2. This
solution indicates that when r
s
= 5%, it is optimal to wait until cash
is available, (i.e.
^
t t), and incur penalty cost. On the other hand,
we let r
s
= 15%. In this case, we nd that it is optimal to borrow
from the bank at cost i = 12% and f = $4 per each loan repayment.
Assuming that the loan repayment per period is $40,000, the opti-
mal solution is Q

11712:3; C

$71; 624;
^
t 20, and optimal
cost is $8304.4. So, it is optimal to nance the inventory by
borrowing rather than incurring a penalty for the payment delay
because the supplier penalty is too high. Keeping r
s
= 15%, and
increasing the cost of borrowing to, for example, i = 18% and
f = $5, we nd that it is optimal for the retailer to delay the pay-
ment and incur a penalty due to the high borrowing cost.
4.4. Effect of percentage margin and length of credit period
As in Jamal et al. (2000), we consider the case when M <
^
t 6 T
and t
^
t, (case IV). This is the case of a strong supplier imposing
unfavorable terms to the retailer, i.e. credit period smaller than
the cycle time. Since the payment time
^
t occurs beyond the credit
period, the retailer incurs a penalty for late payment. Under this
case, we vary the selling price p to study the effect of the percent-
age markup, p/c, which is proportional to the percentage margin.
We assume the following values p/c = (1, 1.25, 1.5, 1.75). For each
value of p/c, we also study the effect of increasing the permissible
delay in payments, by considering M = (0, 20, 30, 40). The results are
illustrated in Table 2 and show that for a xed p/c, the order quan-
tity increases as the length of the credit period increases, thus, the
cash level increases. Also, the cost increases due to the penalty paid
to supplier which increases with the order quantity. Table 1 also
indicates that for a given M, as the unit margin increases, the order
quantity increases, but the cost vary inversely. Also, the optimal
payment time is as soon as the credit period nishes, to avoid
penalty.
We conclude that (i) as a result of the permissible delay in set-
tling the replenishment account, the order quantity increases sig-
nicantly and the optimal cost increases marginally due to
paying interest for period
^
t M. The cash level increases with
the order quantity. (ii) The order quantity and cash level increase
with the margin.
4.5. Effect of holding and storage costs
We now analyze the sensitivity of the model as the holding and
storage costs vary. Using the solution procedure of Sub Section 3.1,
the optimal solution is obtained by comparing the costs for all
cases. The results are summarized in Table 3. First, we notice that
the optimal solution corresponds to case VI, i.e. it is best for the re-
tailer to pay right at the end of the credit period, when the supplier
offers a credit period that goes beyond the cycle time. In this case,
the retailer already has cash from sales, and does not need to
borrow. Having the credit period beyond the cycle time allows
the retailer to raise more cash.
Table 1
Finding the optimal solution.
Case I Case II Case III Case IV Case V Case VI
Q

8219.18 8219.18 12328.76 12945.5 11712.3 1049.5

C

73484.1 60,000 73516.5 75299.5 71,624 21439.9

^
t
40 20 20 21 20 40
Cost $8255.3 $8237.1 $8275.6 $8300.4 $8304.5 $8178.6
L. Moussawi-Haidar, M.Y. Jaber / Computers & Industrial Engineering 66 (2013) 758767 765
Second, we observe that for a given holding and storage cost, as
the retailers return on cash, r, increases, the optimal order quan-
tity decreases. For each ordering cycle, the retailers cash level in
the bank increases at the sales rate, up to maximum level C, incur-
ring a positive cost of holding cash r, which is the opportunity cost
of cash. This is repeated throughout the year. The number of cycles
per year depends on the order frequency. Thus, the cost of holding
cash per unit time is inversely proportional to the order size. To
keep the cash holding cost at its minimum, the order quantity Q
should decrease when r increases. The cash level decreases with
a smaller order quantity. We also notice that, for a given r, the opti-
mal order quantity decreases as the storage cost increases. For
example, for r = 10%, it is optimal to order 1049.5 units when the
storage cost is s = $3994.3 units when s = $4, and 836.9 units when
s = $8.
4.6. Effect of suppliers cost of money
We now examine the effect of the suppliers penalty, repre-
sented by r
s
. Examining the cost expressions in each of the six
different cases, r
s
is relevant only for cases I, IV, and VI, where it
is multiplied by
^
t M, the period over which the retailer is charged
interest for making a late payment. At optimality, we have
^
t M.
Thus, to study the effect of r
s
, we let M = 0, as discussed in Jaber
and Osman (2006). The results are shown in Table 4. Clearly, as
the suppliers penalty increases, it is optimal to order less and
pay earlier. For example, when r
s
= 7%, the optimal order quantity
is 1845.8 units and
^
t 4:49. However, for r
s
= 15%, these gures
become 1829.7 and 4.45 respectively.
5. Conclusion
This paper incorporates cash management into the retailers lot
sizing inventory problem under delay in payments. It reects a real
situation that a retailers operational (order size and payment
time) and nancial decisions (maximum cash level and loan
amount) are interdependent and need to be made simultaneously.
Thus, we formulate a nonlinear program where the objective is to
minimize the inventory and nancial costs. A solution procedure is
developed to nd the optimal solution. Numerical analysis is pre-
sented to investigate when a nancially-constrained retailer
should borrow a loan versus delaying the payment to the supplier
and incurring a penalty. Also, we study the effect of changing var-
ious model parameters such as holding and storage costs and per-
centage margin on the optimal solution, for different values of the
credit period and return on investment. We also analyze the effect
of the suppliers cost of money on the retailers optimal decisions.
Our results indicate that when the retailers return on cash in-
creases, his/her optimal order quantity should decrease, and so
does the maximum cash level. Moreover, the best scenario for
the retailer occurs when the supplier offers a credit period that ex-
ceeds the cycle time. We numerically show that our cash manage-
ment model reduces the retailers cost compared to a model that
ignores cash management considerations. Also, we compare the
suppliers penalty to the borrowing rate and transaction cost for
loan repayment to decide when to borrow and when to pay pen-
alty. Our results indicate that as the percentage margin increases,
the order quantity and maximum cash level increase for a given
credit period, and that they both increase with the credit period.
Increasing the holding and storage cost, the order quantity and
cash level decrease given the retailers return on cash.
Acknowledgments
M.Y. Jaber thanks the Natural Sciences and Engineering
Research Council of Canada (NSERC) for supporting his research,
and the American University of Beirut for the in-kind support
provided during his research visits.
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Table 2
Sensitivity analysis as the percentage markup increases, for different values of the
credit period, when M <
^
t 6 T.
M Q

^
t

Optimal cost
p/c = 1 0 1365.4 24455.2 3.32 $8243.9
20 8630.1 61481.7 21 $8270.4
30 12739.7 65754.8 31 $8284.9
40 16849.3 85906.9 41 $8294.1
p/c = 1.25 0 1384.9 24626.8 2.69 $8239.6
20 10787.6 68738.6 21 $8279.2
30 15924.6 83516.5 31 $8295.2
40 21061.6 96046.9 41 $8301.9
p/c = 1.5 0 1499.2 25625.7 2.43 $8244.3
20 12945.2 75299.4 21 $8291.8
30 19109.6 91487.7 31 $8308.9
40 25273.9 105,214 41 $8310.5
p/c = 1.75 0 1321.1 24055.3 1.83 $8239.7
20 15102.7 81332.8 21 $8305.3
30 22294.5 98,818 31 $8319.8
40 29486.3 113,644 41 $8307.9
Table 3
Sensitivity analysis as the holding and storage costs vary, for different values of the
return on investment.
r Q

^
t

Optimal cost
5 1270.8 33365.5 20 $8207.1
h = 6, s = 3 10 1049.5 21439.4 40 $8178.6
15 915.7 16352.3 40 $8115.5
20 823.9 13433.3 40 $8051.9
5 933.7 28598.8 20 $8214.4
h = 8, s = 8 10 836.9 19143.9 40 $8184.9
15 765.4 14950.2 40 $8121.2
20 710.1 12470.6 40 $8057.1
5 1174.9 32081.1 20 $8208.7
h = 12, s = 4 10 994.3 20868.7 40 $8179.9
15 878.7 16018.5 40 $8116.7
20 796.9 13210.6 40 $8053.1
Table 4
Effect of varying the suppliers penalty when M = 0.
r
s
Q

^
t

Optimal Cost
7 1845.8 29374.4 4.49 $8235.1
10 1839.6 29375.4 4.48 $8235.2
15 1829.7 29375.9 4.45 $8235.2
20 1820.5 29374.9 4.43 $8235.2
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