Determining Optimal Discount Policies for a Supplier in B2B Relationships

Abstract

This research studies which discounts a supplier needs to offer to give incentive to his customers to change their order patterns in a way that minimizes the supplier’s total cost. Savings for the supplier arise from reduction of set up and inventory cost. Customers also profit from this since the total discount offered is greater than their total cost increase. This research assumes zero or low price elasticity of the demand, thus lower prices do not result in greater total demand, they only affect when orders will be placed. A heuristic solution is given by separating the problem into when orders should be placed and how much discount should be offered to make this order pattern the cheapest for the buyer and includes three steps.