A Quantity Discount Pricing Model to Increase Vendor Profits (Monahan) (1)• Strategies for structuring the terms of an optimal quantity discount

schedule (OQDS). • Adjusting present pricing schedule to entice major customer to

increase his present order size by a factor of ‘K.’• Lot sizing with quantity discount possibilities – traditionally, solely

from buyer’s perspective – assume existing pricing schedule.• OQDS determined by a mathematical model which anticipates the

buyer's likely reaction to any vendor proposal.

(2) Price Discounts: The Vendor's Leverage• Advantages of larger individual orders:- Vendor will process fewer orders per year -> lower annual order

processing costs;- Longer production runs and fewer manufacturing set-ups ->

manufacturing cost savings;- Capture transportation discounts currently unavailable ->

transportation cost savings;- Change in order pattern – timing and magnitude of payment (OC).

(3) Keeping the Buyer Satisfied

Deterministic world where:•D1 = the total yearly number of units demanded by party 1 (equal to that demanded by his customers);•S1 = the buyer's fixed order processing cost ($/order);•P1 = the current delivered unit price paid by the buyer ($/unit);•H1 = the buyer's yearly inventory holding cost, expressed as a percentage of the value of the item (%/year);•Q1 = the buyer's current order size (units/order).=>

(3)

(3)

(4) The Vendor's Viewpoint

• S2 = the vendor's order processing and manufacturing set up cost ($/order received);• H2 = the vendor's nominal opportunity cost of capital, expressed as an

annual percentage (%/year);• M2= the vendor's gross profit on sales, expressed as a percent;• P1= the pre-discount unit price received by the vendor.

(4)

(5) Accounting for Transportation Cost Savings

(6) Expanding the Basic Model: Cash Flow Considerations

(7) Summary

• In order to operationalize (6) and (11) the supplier must obtain numerical estimates of D1, S1, and H1.• Only reasonably accurate data inputs are required (insensitivity).• Legal litigation and competitive reaction.