The present model develops a three-echelon supply chain, in which the manufacturer offers full permissible delay to the whole seller, while the latter, in turn, adopts distinct trade credit policies for his subsequent downstream retailers. The type of credit policy being offered to the retailers is decided on the basis of their past profiles. Hence, the whole seller puts forth full and partial permissible delays to his old and new retailers respectively. This study considers bad debts from the portion of new retailers who fail to make up for the delayed part of the partial payment. The analysis shows that it is beneficial for the whole seller to make shorter contracts, particularly with new retailers, along with the fetching of a higher fraction of initial purchase cost from them. In addition to the above-described scenario, the lot received by the whole seller from the manufacturer is not perfect, and it contains some defects for which he employs an inspection process before selling the items to the retailers. In order to make the study more realistic, Type-I, as well as Type-II misclassification errors, and the case of out-of-stock are considered. The impact of Type-I error has been found to be crucial in the study. The present paper determines the optimal policy for the whole seller by maximizing the expected total profit per unit time. For the optimality of the solution, theoretical results are provided. Finally, a numerical example and a sensitivity analysis are done to validate the model.
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