Abstract: The paper develops an inventory model for deteriorating items based on two-level partial trade credit and customer credit rating, and discusses the retailer's optimal ordering strategy with fixed deterioration rate which fits a more general inventory feature. The model assumes the supplier requires the retailer to take mixed payment mode (prepayment, cash payment and permissible delay in payments), and at the same time, the retailer implements differentiated trade credit strategy based on customer credit. The retailer allows delay in all payments for good credit customers and requires prepayments and cash payment for bad credit customers. The paper derives the existence and uniqueness conditions of the optimal solution of the model, and develops a set of theorems to determine the optimal solutions. Finally, a numerical example is presented to illustrate the proposed strategy and optimal solutions, and a sensitivity analysis is performed for changes in the main parameters to obtain relevant findings on managerial implication.

Key words: trade credit, prepayments, permissible delay in payments, customer credit, deteriorating items, inventory model