Charles L. Munson

Coordinating a three-level supply chain with quantity discounts

Numerous examples exist that illustrate how companies enjoying a strong position in a supply chain unilaterally dictate terms to their suppliers and/or their customers. This paper suggests a mechanism by which a company can coordinate its purchasing and production functions and create an integrated plan that dictates order and production quantities throughout a three-firm channel. Specifically, we model a company that attempts to dictate channel lot sizes by obtaining a quantity discount from its supplier while offering perhaps a different one to its customer. Previous quantity discount research has examined supply chains consisting of only two levels, a seller and a buyer. This paper considers a three-level chain (supplier-manufacturer-retailer) and explores the benefits of using quantity discounts on both ends of the supply chain to decrease costs. We show that incorporating quantity discounts into both ends of the supply chain can significantly decrease costs compared to concentrating only on the lower end. Furthermore, the results of the decentralized procedure described here are robust vis-a-vis à centralized decision-making procedure.

Incorporating quantity discounts and their inventory impacts into the centralized purchasing decision

Multi-site organizations must balance conflicting forces to determine the appropriate degree of purchasing centralization for their respective supplies. The ability to garner quantity discounts represents one of the primary reasons that organizations centralize procurement. This paper provides methodologies to calculate optimal order quantities and compute total purchasing and inventory costs when products have quantity discount pricing. Procedures for both all-units and incremental quantity discount schedules are provided for four different strategic purchasing configurations (scenarios): complete decentralization, centralized pricing with decentralized purchasing, centralized purchasing with local distribution, and centralized purchasing and warehousing. For ordering decisions under local distribution, procedures to determine optimal order quantities and costs are presented in a precise form that could be easily implemented into spreadsheets by practicing managers. For the more complicated multi-echelon scenarios, we introduce a single-cycle policy with a tailored aggregation refinement step that performs very well under experimentation when compared to a conservative bound.

Assessing the relative contribution of the facets of agility to distributed systems development success: an Analytic Hierarchy Process approach

Recent studies have sought to identify different types/facets of agility that can potentially contribute to distributed Information Systems Development (ISD) project success. However, prior research has not attempted to assess the relative importance of the various types of agility with respect to different ISD success measures. We believe that such an assessment is critical, since this information can enable organizations to direct scarce organizational resources to the types of agility that are most relevant. To this end, we use the Analytic Hierarchy Process to unearth, from the perspectives of two stakeholder groups of distributed software development projects, managers, and technical staff members, as to which agility facets facilitate (and to what degree) on-time completion of projects and effective collaboration in distributed ISD teams. Furthermore, noting that there is a need for an overall set of prioritized agility facets (by integrating managerial and technically oriented perspectives), we present three ways to aggregate the preferences of the two groups.

A mathematical programming model for global plant location problems: Analysis and insights

In this paper, we study the design of global facility networks. We present a mixed integer programming model that captures essential design trade-offs for such networks and explicitly incorporates government subsidies, trade tariffs and taxation issues. The resulting formulation can be solved for reasonable size problems with commercially available mathematical programming software. Focusing on special cases of the problem enables us to provide useful insights on preferable international facility networks for various environments. We demonstrate the pervasive, and often dominating, effects of subsidized financing, tariffs, regional trade rules and taxation in shaping the manufacturing and distribution network of global firms.

Teaching the costs of uncoordinated supply chains

Supply-chain management has become a prominent area for teaching and research. Academics and managers realize that communication and coordination among members of a supply chain enhance its effectiveness, creating financial benefits to be shared by the members. We have collected numerical examples covering (1) location decisions, (2) centralized warehousing, (3) lot sizing with deterministic demand, (4) demand forecasting, (5) pricing, and (6) lot sizing with stochastic demand in a newsvendor environment. The examples are suitable for classroom use, and they illuminate the rewards supply-chain members can obtain by eliminating naturally occurring supply-chain inefficiencies and the costs of not doing so.

Dynamic demand lot-sizing rules for incremental quantity discounts

Numerous studies have developed and compared lot-sizing procedures for finite-horizon dynamic demand, material requirements planning (MRP), environments when either no purchase discounts exist or for the case of all-units quantity discounts. This paper examines lot-sizing rules when product price schedules follow incremental quantity discounts. The optimal (non-discount) procedure and some traditional heuristic procedures are modified to incorporate incremental quantity discounts. We further modify two heuristics with a ‘look-ahead enhancement’ that performs very well under experimentation. Numerical tests revealed the overall best-performing heuristic in this study to be a modified ‘least-unit cost’ method with a look-ahead enhancement. That procedure produced an average cost penalty vs optimal of 0.26%.

Flexible supply contracts under price uncertainty

This article develops supply contracts covering environments with changing prices. We investigate characterization properties of the price processes, while considering costs and discount factors. We determine expressions of the contracts expected low price and its second moment for a given horizon. We then employ these expected price and second moment values to identify an expected optimum time before the contract expires at which the lowest price occurs. Simulation experiments verify our analysis, and they illustrate how the optimum purchase time decreases as the drift term increases.

A modified Silver–Meal heuristic for dynamic lot sizing under incremental quantity discounts

This note presents a variation of the well-known Silver–Meal heuristic to deal with lot sizing under a combination of a known, but time-varying, demand pattern along with an incremental quantity discount structure. The heuristic is shown to perform very well on a set of experiments presented in a recent paper in this journal. Additional experiments are performed to further explore the time horizon effects on the relative performance of the newly proposed heuristic compared to the two best performing ones from the previous paper.

Quantity Discounts: An Overview and Practical Guide for Buyers and Sellers

Sellers commonly provide price discounts for large orders; in fact, quantity discounts have existed as ubiquitous tools of commerce for hundreds of years. In some industries today, quantity discounts are more common than not in business-to-business transactions. For example, large discount retailers demand price breaks from their suppliers, and they typically then pass on a portion of the savings to final consumers. Practitioners face the issue from two sides. For sellers, what form of quantity discounts makes the most sense, and how should the discounts be priced? What role should quantity discounts play in the larger contract negotiation scheme? For buyers, how many units should be ordered when faced with a quantity discount schedule? And under what conditions should a buyer take the lead and attempt to negotiate a discount schedule from its supplier?

The appeal of partially centralised purchasing policies

This paper provides a tool for managers to help them determine which items at which sites should be procured under some form of centralised purchasing scheme. Seven cost categories are analysed under three purchasing scenarios: (1) decentralised purchasing, (2) centralised purchasing, and (3) centralised pricing with decentralised purchasing. Numerical experimentation suggests that, most often, a hybrid combination of the three purchasing scenarios is best. For large problems, calculation of the optimal configuration becomes computationally cumbersome; therefore, an efficient heuristic ranking solution procedure is developed that performs well under experimentation. The relative simplicity of the heuristic allows managers to readily implement the model in this paper in order to help them make the important strategic decision regarding their degree of purchasing centralisation.