A continuous review inventory model with a time discount

Ki Ling Cheung

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Supply Chain and Inventory Management Sustainable Supply Chain Management Logistics and Transportation Systems

Abstract

This paper presents a continuous review inventory model with a lost sales assumption. The model is unique due to the inclusion of a time discount. Whenever the supplier faces the likelihood of being out of stock, he may issue a discount to motivate customers to accept delayed deliveries and thus avoid the occurrence of lost sales. We propose a control policy with four parameters R 1, Q, R 2 and T where R 1 and Q are the normal reorder point and quantity, respectively and R 2 and T are the triggers for this time discount. During each replenishment cycle, if the on-hand inventory drops to R2 at or before T after the reorder time epoch, the time discount will be granted. A derivation as well as a solution approach for the total cost function are provided. Based on computational results, such a system with a time discount is superior to that without a time discount in terms of minimizing the total system cost. Finally, we compare the performance of the time discount and the emergency ordering approaches.

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References

1964Analysis of Inventory Systems.1979Decision Systems for Inventory Management and Production Planning 1986Decision systems for inventory management and production planning 1984A Quantity Discount Pricing Model to Increase Vendor Profits 1986A Generalized Quantity Discount Pricing Model to Increase Supplier's Profits 1988A Continuous Review Model for an Inventory System with Two Supply Modes 1988Service Constrained (s, S) Inventory Systems with Priority Demand Classes and Lost Sales 1985Single‐period inventory models with demand uncertainty and quantity discounts: Behavioral implications and a new solution procedure

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