A Research On Retailer’s Optimal Ordering Policy Under Quantity Discount Policy

In order to motivate buyers to increase their order quantity, suppliers oftenrely on a well established and widely used approach–they offer quantitydiscounts. Retailers’ overstock cost will increase due to demand uncertainty ifordering excessively while enjoying the benefit from the quantity discountpolicy, however, retailers will lose key customers if ordering insufficiently andbecome out of stock. So to realize perfect balance between risk and profit, it’sextremely important for retailers to determine ordering policies.This research studied a buyer facing stochastic end-item demand and asupplier offering quantity discount to him, and derived buyer’s single-periodoptimal ordering policy by minimizing buyer’s single-period total cost in case ofordering under all-unit quantity discount and incremental quantity discountcontract respectively. To derive buyer’s multi-period optimal ordering policy, anumeric experiment is conducted according to dynamic programming under agiven set of parameters, and finally discovered buyer’s infinite horizon optimalordering policy is convergent. It’s helpful for buyers to refer to the optimalordering policies in making short-term, mid-term or long-term ordering policy.Besides, buyer’s total cost under all-unit quantity discount and incremental quantity discount contract in the case of multi-period ordering are compared todevelop insights as to the fact that buyer’s risk under incremental quantitydiscount is higher than that under all-unit quantity discount. And buyer’s infinitehorizon optimal ordering policy under all-unit quantity discount andincremental quantity discount are compared to conclude that the optimalordering policy under incremental quantity discount is more sensitive to thechange of initial inventory position than that under all-unit quantity discount.