Inventory Models
Quantity Discount Models
TYPES OF QUANTITY
DISCOUNT MODELS
Quantity Discount Models are of two types
All Units Discounts
Above a certain order level, Q1, all units in the
order are discounted (Usual Case)
Incremental Discounts (Not Discussed Here)
Above a certain order level, Q1, all items above Q1
are discounted the first Q1 items are sold at a
non-discounted price
ALL UNIT QUANTITY DISCOUNTS
Reconsider the juicer example where:
H = .14, CO = 12, D = 6240/yr
Suppose the following all-unit discount
pricing plan applies:
Quantity
Ordered
Unit
Cost
<300
300- 600
600-1000
1000-5000
5000
$10.00
$ 9.75
$ 9.50
$ 9.40
$ 9.00
PIECEWISE APPROACH
Consider each quantity discount for Ci as if it were
valid everywhere from 0 -
STEP 1: For each value of Ci, calculate the
corresponding value of Qi* -- it will change slightly
since Ch = HCi and Ci changes slightly.
STEP 2: For each quantity discount for Ci, consider
the interval (from a lower limit QL to an upper limit
QU) over which the price Ci is valid and determine the
value of Q that gives the lowest cost for the interval.
(See next slide.)
STEP 3: Compare the lowest costs for each interval,
and choose the lowest of these interval lowest costs.
DETERMINIG THE BEST VALUE OF Q
FOR EACH INTERVAL AND OVERALL
BEST VALUE OF Q FOR AN INTERVAL
BETWEEN QL AND QU
If Q* >QU, ignore this interval
if Qi* is in interval, Qopt = Qi*
If Q* < QL, Qopt = QL
QOPT for the interval in which Qi* > QU
TC
Lowest point occurs at QU.
Qopt = QU
But we can see that Q*
(which will have an even
deeper discount) gives a
lower total cost, TC.
QL
QU
Qi*
QOPT When Qi* Is In the Interval
Q* is the lowest point in the interval.
Qopt = Q*
TC
QL
Q*
QU
QOPT for the interval in which Qi* < QL
TC
Lowest point occurs at QL.
Qopt. = QL
Q*
QL
QU
Calculations for C = $10
Interval (0,300)
2(12)(6240)
Q*
327
.14(10)
Since Q* > 300, the optimal solution for
the model cannot come from this interval.
Calculations for C = $9.75
Interval (300,600)
2(12)(6240)
Q*
331
.14(9.75)
Since Q* = 331 is in the interval (300,600),
for this interval: Qopt = Q* = 331
CO D C H
TC (Qopt )
Qopt CD
Qopt
2
(12)(6240) 1.365
TC (331)
(331) (9.75)(6240) $61,292
331
2
Calculations for C = $9.50
Interval (600,1000)
2(12)(6240)
Q*
336
.14(9.50)
Since Q* = 336 < 600,
for this interval: Qopt = 600
CO D C H
TC (Qopt )
Qopt CD
Qopt
2
(12)(6240) 1.33
TC (600)
(600) (9.50)(6240) $59,804
600
2
Calculations for C = $9.40
Interval (1000,5000)
2(12)(6240)
Q*
337
.14(9.40)
Since Q* = 337 < 1000,
for this interval: Qopt = 1000
CO D C H
TC (Qopt )
Qopt CD
Qopt
2
(12)(6240) 1.316
TC (1000)
(1000) (9.40)(6240) $59,389
1000
2
Calculations for C = $9.00
Interval (5000, )
2(12)(6240)
Q*
345
.14(9.00)
Since Q* = 345 < 5000,
for this interval: Qopt = 5000
CO D C H
TC (Qopt )
Qopt CD
Qopt
2
(12)(6240) 1.26
TC (5000)
(5000) (9.00)(6240) $59,325
5000
2
QUANTITY DISCOUNT
APPROACH FOR ALLEN
Quantity Unit Cost Ch
< 300
$10.00
300-600 $ 9.75
600-1000 $ 9.50
1000-5000 $ 9.40
5000
$ 9.00
ORDER 5000
$1.40
$1.365
$1.33
$1.316
$1.26
Q*
Qopt
TC
327
331
336
337
345
---331
600
1000
5000
---$61,292
$59,804
$59,389
$59,325
Note: This is over a 9 month supply -- is this OK?
REORDER POINT ANALYSIS
Reorder point and safety stock
determination are not affected by quantity
discounts.
They are found in the same way as before:
r* = LD + SS
if demand is constant over lead time
r* is found using service levels
if demand varies during lead time
Using the Template
Enter Values
Optimal Values
Enter Discount Breaks
and Discount Prices
All-Units Worksheet
Review
Types of Discount Models:
All-unit and Incremental
All-Units Quantity Discount Model
Qi* is found for each interval from QL to QU
Best point for interval is Qi* if Qi* is in interval
If Q* < QL, QL is best point for interval
Best value of Q is found by finding the
lowest cost for each interval and taking the
Q with the lowest total cost.
Reorder point analysis is not affected.
Use of template
