Management Science and Financial Engineering

The Korean Operations Research and Management Science Society (한국경영과학회)
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Evaluation of Quantity Discounts for Buyer's Stocking Risk

  • Shin, Ho-Jung (Department of LSOM, Korea University Business School) ;
  • Benton, W.C. (Department of Management Sciences Max F. Fisher College of Business, The Ohio State University Columbus) ;
  • Park, Soo-Hoon (Department of LSOM, Korea University Business School)
  • Received : 2010.01.22
  • Accepted : 2010.11.03
  • Published : 2010.11.30
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Abstract

Quantity discounts provide a practical foundation for supply chain inventory policies, improving the supplier's profit and reducing the buyer's inventory cost simultaneously. Traditional quantity-discount research, which deals with inventory coordination between a buyer and a supplier, is extended to a stationary stochastic environment. This research shows that the magnitude of the optimal discounts scheduled by the deterministic quantity discount models may not be large enough to cover the buyer's additional inventory stocking risks under uncertain conditions. As a result, the buyer's total inventory cost may often increase rather than decrease. In contrast, the proposed model allows the supplier to identify the discount level, which shares the buyer's amplified risk associated with temporary overstocking and ensures that both buyer and supplier benefit economically. The performance of the proposed model was tested in the continuous review environments via numerical experiments. The experimental results support the proposed method as a feasible alternative in coordinating inventory decisions under stochastic demand.

Keywords

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