Optimal Inventory Control with Discount-Driven Special Orders: A Three-Phase Approach

Abstract

Instead of regular orders, special orders are placed whenever price change occurs in the inventory policies.  When price reduction is available to the retailer, the objective of the retailer is to get a maximum benefit from the orders placed under discount. In order to get rid of excess stock, wholesaler offers discount to the retailers. Quite often the discount will give a minimum duration. Beyond this duration, in order to sell the excess stock the discount will be given until the “Supplies last”. This leads to the division of the planning horizon into three parts. Optimal policies have been discussed under deterministic, stochastic and no discount durations. This method has a stronger economic interpretation in terms of optimality as the nature of optimal orders will be different in three different situations. Since the determination of the orders placed during the stochastic period of discount is not straight forward, attention need to be given to determine the optimal policies, unlike earlier methods. A sensitivity analysis is carried out with respect to various parameters to determine optimal order levels and reorder levels.