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INVENTORY - Quantity Discount Models

This document discusses quantity discount models, specifically all-units quantity discounts. It describes calculating the optimal order quantity (Qopt) for each discount tier by finding the Q* that minimizes total cost within each tier. The tier with the overall lowest total cost determines the best Qopt. Reorder point calculations are not affected by discounts and are determined the same way as without discounts. The document provides an example application of this approach and recommends using a template to simplify the calculations.

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207 views17 pages

INVENTORY - Quantity Discount Models

This document discusses quantity discount models, specifically all-units quantity discounts. It describes calculating the optimal order quantity (Qopt) for each discount tier by finding the Q* that minimizes total cost within each tier. The tier with the overall lowest total cost determines the best Qopt. Reorder point calculations are not affected by discounts and are determined the same way as without discounts. The document provides an example application of this approach and recommends using a template to simplify the calculations.

Uploaded by

Raghaven143
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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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 <300 300- 600 600-1000 1000-5000 5000 Unit Cost $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


Lowest point occurs at QU. Qopt = QU

TC

But we can see that Q* (which will have an even deeper discount) gives a lower total cost, TC. QL QU Qi* Q

QOPT When Qi* Is In the Interval


TC

Q* is the lowest point in the interval. Qopt = Q*

QL

Q*

QU

QOPT for the interval in which Qi* < QL


Lowest point occurs at QL. Qopt. = QL

TC

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)


Q* 2(12)(6240 ) 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)


Q* 2(12)(6240 ) 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,)


Q* 2(12)(6240 ) 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 $1.40 300-600 $ 9.75 $1.365 600-1000 $ 9.50 $1.33 1000-5000 $ 9.40 $1.316 5000 $ 9.00 $1.26 ORDER 5000 Q* 327 331 336 337 345 Qopt ---331 600 1000 5000 TC ---$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

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