A quantity discount approach to supply chain coordination

Abstract

Quantity discounts provide a practical foundation for inventory coordination in supply chains. However, typical supply chain participants may encounter difficulties in implementing the coordination policy simply because (1) specified lot size adjustments may deviate from the economic lot sizes and (2) the buying firm may face amplified overstocking risks related to increased order quantities. The main objective of this study is to develop a quantity discount model that resolves the practical challenges associated with implementing quantity discount policies for supply chain coordination between a supplier and a buyer. The proposed Buyer's Risk Adjustment (B-RA) model allows the supplier to offer discounts that capitalize on the original economic lot sizes and share the buyer's risk of temporary overstocking under uncertain demand. The analytical results suggest that the proposed B-RA discount approach is a feasible alternative for supply chain coordination under uncertain demand conditions. © 2006 Elsevier B.V. All rights reserved.