Unit 2Management of Conversion SystemChapter 10: Inventory ManagementLesson 30 - Quantity discount models
Learning ObjectivesAfter reading this lesson you would be able to understand
Role of quantity discount in inventory decisions
Quantity discount model
Continuous review systems
Periodic review systemsGood Morning students, today we are going to introduce the concept of what is knownas quantity discount model and the various types of inventory review systems.
Well friends, we started off with the concept of inventory management during the previous lectureand were able to cover quite a bit of ground. Today we shall start our discussions with Quantitydiscount models.
To increase sales, many companies offer quantity discounts to their customers. Aquantity discount is simply a reduced price (P) for the item when it is purchased inlarger quantities. It is common to have a discount schedule with several discounts for large orders.As always, management must decide when and how much to order. But withquantity discounts, how does the operations manager make these decisions?As with other inventory model, the overall objective will be to minimize thetotal cost. Placing an order for the quantity with the greatest discount price might notminimize the total inventory cost. As the discount quantity goes up, the product costgoes down, but the holding cost increases because the orders are large. Thus, themajor trade-off when considering quantity discounts is between the reduced product