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Incorporating quantity discounts and their inventory impacts into the centralized purchasing decision

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  • Munson, C.L.
  • Hu, J.

Abstract

Multi-site organizations must balance conflicting forces to determine the appropriate degree of purchasing centralization for their respective supplies. The ability to garner quantity discounts represents one of the primary reasons that organizations centralize procurement. This paper provides methodologies to calculate optimal order quantities and compute total purchasing and inventory costs when products have quantity discount pricing. Procedures for both all-units and incremental quantity discount schedules are provided for four different strategic purchasing configurations (scenarios): complete decentralization, centralized pricing with decentralized purchasing, centralized purchasing with local distribution, and centralized purchasing and warehousing. For ordering decisions under local distribution, procedures to determine optimal order quantities and costs are presented in a precise form that could be easily implemented into spreadsheets by practicing managers. For the more complicated multi-echelon scenarios, we introduce a single-cycle policy with a tailored aggregation refinement step that performs very well under experimentation when compared to a conservative bound.

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  • Munson, C.L. & Hu, J., 2010. "Incorporating quantity discounts and their inventory impacts into the centralized purchasing decision," European Journal of Operational Research, Elsevier, vol. 201(2), pages 581-592, March.
    • Handle: RePEc:eee:ejores:v:201:y:2010:i:2:p:581-592
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    References listed on IDEAS

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    2. Taleizadeh, Ata Allah & Pentico, David W., 2014. "An Economic Order Quantity model with partial backordering and all-units discount," International Journal of Production Economics, Elsevier, vol. 155(C), pages 172-184.
    3. Jackson, Jonathan E. & Munson, Charles L., 2016. "Shared resource capacity expansion decisions for multiple products with quantity discounts," European Journal of Operational Research, Elsevier, vol. 253(3), pages 602-613.
    4. Manerba, Daniele & Mansini, Renata & Perboli, Guido, 2018. "The Capacitated Supplier Selection problem with Total Quantity Discount policy and Activation Costs under uncertainty," International Journal of Production Economics, Elsevier, vol. 198(C), pages 119-132.
    5. Jackson, Jonathan E. & Munson, Charles L., 2019. "Common replenishment cycle order policies for multiple products with capacity expansion opportunities and quantity discounts," International Journal of Production Economics, Elsevier, vol. 218(C), pages 170-184.
    6. Michael Katehakis & Laurens Smit, 2012. "On computing optimal (Q,r) replenishment policies under quantity discounts," Annals of Operations Research, Springer, vol. 200(1), pages 279-298, November.
    7. Rothkopf, Alexander & Pibernik, Richard, 2016. "Maverick buying: Eliminate, participate, leverage?," International Journal of Production Economics, Elsevier, vol. 179(C), pages 77-89.
    8. Li, Jin & Yang, Shilei & Shi, Victor & Zhai, Senjing, 2020. "Partial vertical centralization in competing supply chains," International Journal of Production Economics, Elsevier, vol. 224(C).
    9. Tamjidzad, Shahrzad & Mirmohammadi, S. Hamid, 2015. "An optimal (r, Q) policy in a stochastic inventory system with all-units quantity discount and limited sharable resource," European Journal of Operational Research, Elsevier, vol. 247(1), pages 93-100.
    10. Li, Jin & Shi, Victor, 2019. "The benefit of horizontal decentralization in durable good procurement," Omega, Elsevier, vol. 82(C), pages 13-23.
    11. Fang Fang & Harihara Prasad Natarajan, 2020. "Sourcing and Procurement Cost Allocation in Multi‐Division Firms," Production and Operations Management, Production and Operations Management Society, vol. 29(3), pages 767-787, March.
    12. Aria Shahsavar & Nima Zoraghi & Babak Abbasi, 2018. "Integration of resource investment problem with quantity discount problem in material ordering for minimizing resource costs of projects," Operational Research, Springer, vol. 18(2), pages 315-342, July.
    13. Menghan Chen & Sheng Ang & Lijing Jiang & Feng Yang, 2020. "Centralized resource allocation based on cross-evaluation considering organizational objective and individual preferences," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 42(2), pages 529-565, June.
    14. Manerba, Daniele & Mansini, Renata, 2012. "An exact algorithm for the Capacitated Total Quantity Discount Problem," European Journal of Operational Research, Elsevier, vol. 222(2), pages 287-300.

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