Dynamic Inventory Models with Quantity Discounts

This chapter addresses issues pertaining to procurement decisions where the unit purchase price does not remain constant throughout the year, assumed in the classical EOQ models. Two types of unit price variations are considered: one in which the unit price is linked with order quantity for incentivizing bulk purchases by reducing the unit price if order quantity is beyond a threshold value called price-break points. Two types of quantity discount models were considered: all-unit discount and incremental discount. In all-unit discount model, the reduced price is valid for each unit in the order quantity, whereas in incremental discount, only the quantity exceeding the price-break quantity is available at lower unit price. Obviously the “all-unit discount” has greater motivation on the part of the buyer to place higher order size as compared to the incremental discounts. It is important in all cases dealt with in this chapter to include total purchase cost as a component of total system cost. The optimal choice is contingent upon the situation and therefore each case needs to be examined, and out of the options available, the least cost option must be chosen. It is also shown that under incremental discount, the EOQ will never occur on the price-break points. In case of announced price increase at a future date, a model to determine special optimal order quantity is given, with a caution to curb the tendency to hoard which creates artificial shortages.