Tag: quantity discount

Guest Post: Odd Quantity Discounts

Our Guest Post today comes from Howard Weiss, who is Professor of Operations Management at Temple University. 

Several of the models in OM assume proportionality, so when I get to break-even analysis (Supp.7), I explain that one of the assumptions is that the cost/unit for each unit is identical and the revenue/unit is identical for each unit. I like to ask the students to give me examples where it would not be the case that revenue is directly proportional to the number of units sold. The bulk of the examples the students cite are due to quantity discounts. I explain that our basic breakeven, transportation and LP models (Modules C and B) do not allow for quantity discounts but that when examining inventory (Chapter 12) we will see models that include quantity discounts.
What I like to bring into class though, for amusement, are odd instances of quantity “discounts”. Very recently I was in a Houligan’s restaurant and saw the cost per wing was more for 10 wings than for 6 wings. Jack’s Restaurant and Bar in NYC currently has what I think is an interesting pricing option for Tapas when comparing 3, 4, and 5 tapas. Lancer’s is a very nice diner near Philadelphia. It has what I think is an interesting pricing strategy when you compare the price of 12 oz. for two products with the same cost for 8 oz. glasses.

I usually delay the next example until I teach LP. Stroehmann’s bread is interesting. The picture below is from a loaf of bread from a few years back. Stroehman’s used to report nutrition for both 1 and 2 slices. The newer packages only report the calories in one slice. Two slices of bread have 110 calories whereas one slice has 50 calories. Of course, the calories should be proportional.

Best Buy once ran a sale where buying 100 DVDs was less expensive than buying 50 DVDs. Not less expensive per DVD but rather less expensive in total cost! I always encourage my students to be alert for these odd quantity discounts.

 

Guest Post: Quantity Discounts are Everywhere

Chuck MunsonToday’s Guest Post comes from Prof. Chuck Munson, at Washington State University. Jay and I are pleased that Chuck is joining us as co-author on the new edition of our texts, coming out in January, 2016.

We can’t walk down most any aisle of the local grocery store without seeing multiple package sizes for products with (quite often) a quantity discount in the form of a lower price per unit for purchasing the larger size. Companies experience the same thing. Firms responding to a recent survey reported a large level of quantity discount pricing in business-to-business transactions, and 67% of respondents negotiate more than half of their prices.

Some of the most common operations reasons for the existence of quantity discounts include: (1) to receive cost savings due to economies of scale, (2) to increase order size and decrease order frequency, (3) to take advantage of truckload rates and transportation discounts, and (4) to be able to ship in standard package and container sizes. Quantity discounts are used for marketing purposes as well, including: (1) to increase annual demand, (2) to lock in customers for the long term, and (3) to win large orders from business customers.

quantity disct 2quantity disct 1If you’ve ever taught the EOQ model with quantity discounts (Ch. 12 in the text) in your OM class, your students may be like mine. For some reason, many seem to have difficulty grasping the solution technique. Rather than give up, though, I keep teaching it because quantity discounts are so prevalent in industry. Apparently, proper ordering techniques are not yet widespread in practice. Thirty percent of sellers and buyers in the recent survey claimed to base discounts and order quantities on intuition rather than on models and algorithms. Further, 1/4 of the buyers often order at a price breakpoint of incremental quantity discount schedules, which is never optimal. Clearly, companies are leaving a significant amount of dollars on the table.

For more details and a literature review of more than 250 papers on quantity discounts, see: www.cbe.wsu.edu/~cmunson/Research%20Papers/Quantity%20Discounts%20TOM-041.pdf