Quantity discount purchasing

Quantity discounts Quantity discounts traditionally have been offered as an incentive for purchasing large quantities of single products or a special grouping of specific products offered by a manufacturer (West, 2003). For example, a wholesaler may sell one bottle... 

Pharmacies often choose one pharmaceutical wholesaler and esfablish a prime vendor relationship. The prime vendor relationship is an agreement that stipulates that the pharmacy will purchase a set amount of drugs from the wholesaler. In return for guaranteed purchases, wholesalers provide a discormf to fhe pharmacy. As parf of the agreement, wholesalers may provide further discounts based on purchase volume. Some pharmacies might also retain a secondary wholesaler to use as an alternative source of pharmaceuticals. However, purchases from fhe secondary wholesaler are usually kept to a minimum so as not to jeopardize quantity discounts from the primary wholesaler. 

This can be further enhanced by realizing the quantity discounts that will become available because of the company s increased volumes and its redesigned purchasing processes. This will apply to almost all mergers and acquisitions in which product overlaps exist... 

Attention Bookstores, Wholesalers, Schools, and Corporations ASQ Quality Press hooks, videotapes, audiotapes, and software are available at quantity discounts with hulk purchases for business, educational, or instructional use. For information, please contact ASQ Quality Press at 800-248-1946, or write to ASQ Quality Press,... 

Most Visible Ink Press books are available at special quantity discounts when purchased in bulk by corporations, organizations, or groups. Customized printings, special imprints, messages, and excerpts can be produced to meet your needs. For more information, contact Special Markets Director, Visible Ink Press, www.visibleink.com, or 734-667-3211. 

Option Vp. The retailer does not adopt the quantity discount proposed by the wholesaler. When the retailer chooses this option, she/he purchases the products from the wholesaler at an initial price in the absence of the discount, and she/he determines her/himself an optimal order quantity, which maximizes her/his own total profit per unit of time. 

Estimates of working capital requirements fall Into four cireas inventories, accounts receivable, cash in hand, and current liabilities. To estimate these, it is necessary to consider the different production stages in which materials can be found, wdiich are (1) raw materials paid for but not received (a portion of current assets) (2) raw materials on hand but not paid for (a portion of current liabilities) (3) materials in process (4) finished products in store whether on-site orpff-site and (5) finished prod-ucts delivered to customers but not yet paid for (accounts receivable). The calculation of the amounts of each of these material inventories depends on such factors as distance from raw material suppliers, types of contracts for raw material purchases, raw material purchase fh nancing methods, quantity discounts and lot sizes available for raw materials, available modes of transportSition, cost of storage facilities, plant size and capacity, seasonality of sales volumes, marketing system, and customer credit policies. 

Quantity discounts refer to the practice of offering lower prices for large volume purchases. There are two types of quantity discoimts offered by vendors as follows ... 

All-unit" quantity discounts Under this scenario, the entire purchase will be charged at a lower price based on the order quantity. Figure 5.1 illustrates an example of "all-unit" quantity discount price structure. 

Figure 5.2 also represents a nonlinear cost function. It can be linearized using binary variables, similar to the all-unit quantity discount model. Let 8i, 82, and 83 be the binary variables for each price range and Xj, X2 and X3 are the quantity purchased under price ranges 1,2, and 3. Then, the linear IP formulation becomes as follows ... 

The quantity discounts and price breaks offered by the suppliers are given in Table 6.9. The Level 1 break points represent the quantity at which price discounts apply. Level 2 break points represent the maximum quantity of a particular product a supplier can provide to that buyer. For example, for product 1, Buyer 1 and Supplier 1, the first 85 units will cost 180/unit and the next 65 units (i.e., 150-85) will cost 165/unit no more than 150 units of product 1 can be purchased from Supplier 1 by Buyer 1. 

MIT Press books may be purchased at special quantity discounts for business or sales promotional use. For information, please email special sales mitpress.mit.edu or write to Special Sales Department, The MIT Press, 55 Hayward Street, Cambridge, MA 02142. 

Given a pricing schedule with quantity discounts, what is the optimal purchasing decision for a buyer seeking to maximize profits How does this decision affect the supply chain in terms of lot sizes, cycle inventories, and flow times ... 

Volume-based quantity discount Observe that the two-part tariff is really a volume-based quantity discount whereby the retailer DO pays a lower average unit cost as it purchases larger quantities each year (the franchise feeffis amortized over more units). This observation can be made explicit by designing a volume-based discount scheme that gets the retailer DO to purchase and sell the quantity sold when the two stages coordinate their actions. 

As discussed in Chapter 16, setting a fixed price for all units does not maximize profits for the manufacturer. In principle, the manufacturer can obtain the entire area under the demand curve above its marginal cost by pricing each unit differently based on customers marginal willingness to pay at each quantity. Quantity discounts are one mechanism for price discrimination because customers pay different prices based on the quantity purchased. 

Understand the impact of quantity discounts on lot size and cycle inventory. Lot-size-based quantity discounts increase the lot size and cycle inventory within the supply chain because they encourage buyers to purchase in larger quantities to take advantage of the decrease in price. 

Prefab, a furniture manufacturer, uses 20,000 square feet of plywood per month. Its trucking company charges Prefab 400 per shipment, independent of the quantity purchased. The manufacturer offers an all unit quantity discount with a price of 1 per square foot for orders under 20,000 square feet, 0.98 per square foot for orders between 20,000 square feet and 40,000 square feet, and 0.96 per square foot for orders larger than 40,000 square feet Prefab incurs a holding cost of 20 percent. What is the optimal lot size for Prefab What is the annual cost of such a policy What is the cycle inventory of plywood at Prefab How does it compare with the cycle inventory if the manufacturer does not offer a quantity discount but sells aU plywood at 0.96 per square foot ... 

Coordination and open lines of communication in the supply chain can provide more accurate information however, information does not always flow freely. When communication is lacking, companies upstream in the supply chain typically use past orders instead of actual demand to produce forecasts. Unfortunately, past orders may not translate into shipments or actual demand. Orders, production, shipments, and actual demand each can be significantly different. Quantity discounts and large lots, pricing policies and promotions, purchase incentives, and company safety stock policies all can skew actual demand. 

Making the switch to JIT purchasing is not simply focused on ordering less to reduce inventory levels. Ordering less means that more purchase orders are required to fulfill demand, which requires reducing order costs first. To illustrate, if the caf from the previous example is not offered a quantity discount, but instead has opted for JIT purchasing, how would cost be affected as coffee beans are purchased more often but in smaller quantities ... 

Furthermore, Eqs. (2.21)-(2.23) can be added to model quantity discounts, i.e., price reductions offered by the suppliers to induce large orders. Certainly, the relationship between the discount factor offered by external supplier e for raw material r (DFerd) and the amount of raw material purchased can be modeled as a piecewise linear function (see Fig. 2.4). The inclusion of these constraints allows the potential benefits... 

Chelsea House books are available at special discounts when purchased in bulk quantities for businesses, associations, institutions, or sales promotions. Please call our Special Sales Department in New York at (212) 967-8800 or (800) 322-8755. 

---