The Effect of Different Payment Terms on Order Variability in a Supply Chain

Literature on supply chain management has acknowledged the effects of forecasting techniques, lot sizing rules, centralising information system, vendor managed inventory, and various biases and noises on order variability or bullwhip effect. We will show in this chapter that order variability from a buyer is also affected by the payment terms offered by the supplier. We develop mathematical models to accommodate different payment terms into the lot sizing techniques. The models are then simulated under uncertain demand situations over a range of parameter values. The results suggest that payment terms have substantial impacts on order variability passed by a supply chain channel onto its upstream channel.