Supplier's Pricing Policy in a Just-in-Time Environment

Abstract

We analyze the impact of all-units quantity discounts on channel coordination in a system consisting of one supplier and a group of heterogeneous buyers. A cash-flow-oriented lotsizing model shows the supplier's pricing decision as well as the buyers’ purchasing decisions. In order to fully exploit the existing coordination possibilities, an all-units quantity discount schedule with multiple price breaks is considered. Our analysis provides insight into the efficiency of channel coordination through quantity discounts, as well as the influence of the number of price breaks and the heterogeneity of the system. We show that quantity discounts significantly improve the supplier's as well as the buyers’ efficiency.

Scope and purpose

Buyers implement Just-in-Time (JIT) systems primarily to reduce costs and inventories by decreasing the order quantity and by shortening the delivery cycle length. This in turn induces a higher level of activities in the suppliers distribution division. Furthermore, the JIT-systems require the shipment of only good parts from the suppliers to the buyers. Suppliers who want to ensure good parts shipments have to introduce additional quality control processes into their distribution division. Both trends increase the suppliers costs for processing orders.

A supplier facing this situation may reduce his costs by changing his pricing policy, e.g. by introducing a quantity discount schedule. In order to analyze the attractiveness of quantity discounts, a cash-flow-oriented model of a logistical system is formulated and investigated with respect to the typical evolution from a traditional logistical system to a JIT-system.