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