The effect of extended payment terms on purchasing decisions

In this paper, computer algorithms are developed for determining optimal purchasing strategies for firms that receive extended payment terms from vendors. The resultant models are particularly attractive in high-volume environments with extended payment terms, a high opportunity cost of capital, and relatively large inventory-related costs. It is shown that purchases of quantities smaller than the traditional Economic Order Quantity may be appropriate in these environments and other situations where vendors offer either all-units or incremental purchase price discounts. The resultant algorithms are solved in this study using a spreadsheet-based search procedure implemented on a personal computer.