3/21: The Quantity Discount Model

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Presentation transcript:

3/21: The Quantity Discount Model Roll call, return homework, collect homework Review EOQ model Quantity Discount Model Small group exercise Homework

Review EOQ Model TC = Ann. Hold. Cost + Ann. Order Cost Ideal Order Quantity (EOQ) Cycle Time

EOQ Model: Curves The EOQ will be the quantity that minimizes the overall annual cost. Annual Cost Combined curve: holding + setup. Minimum annual cost Holding cost curve Setup cost curve Optimal order quantity Order Quantity

Quantity Discount Model Often, there are price breaks for ordering greater quantities of a product. The formulas used to determine the EOQ remain, but… Q1 Q2 Q3 C1 C2 C3

Quantity Discount Model Often, there are price breaks for ordering greater quantities of a product. EX: Q1 < 1000 units C1 = $4.03 1000 <= Q2 < 2000 C2 = $4.00 2000 <= Q3 C3 = $3.97 Q1 Q2 Q3 C1 C2 C3

Quantity Discount Model Calculate the Q* for each price. If the Q* is out of the range of the price level, use the nearest point possible. Calculate the total cost of the system (not just inventory system) to see which is lowest. Must include the cost of product to compare!

Example You order a product that has a price break offered: Order less than 1000 $4.03 / unit Order 1000 to less than 2000 $4.00 / unit Order 2000 or more $3.97 / unit Your annual holding cost rate is 10% Your cost per order is $5.00 Your annual requirement is 5,000 units. see spreadsheet

Group Exercise You order a high-demand software package that has a price break offered: Order less than 5 $169.00 / unit Order 5 to less than 50 5% discount / unit Order 50 to less than 100 8% discount / unit Order 100 or more 10% discount / unit Your annual holding cost rate is 30% Your cost per order is $ 5.00 Your annual requirement is 2,500 units.

Homework (due 4/4) Ch. 11 #20, 21, 22 (show your work) You can use Excel to do this, or do it by hand. TURN IT IN ON PAPER REGARDLESS on 4/4. No class next week – Holy Thursday. Happy Easter!