Coordinated replenishment systems with discount opportunities

In many practical situations, coordination of replenishment orders for a family of items can lead to considerable cost savings. A well-known class of strategies for the case where cost savings are due to reduced joint ordering costs is the class of can-order strategies. However, these strategies, which are simple to implement in practice, do not take discount possibilities into account. The authors propose a method to incorporate discounts in the framework of can-order strategies. A continuous review multi-item inventory system is considered with independent compound Poisson demand processes for each of the individual items. Discounts are offered by the supplier as a percentage of the total dollar value whenever this value exceeds a given threshold. Starting from the can-order strategy as a basic decision rule, the authors develop a simple heuristic to evaluate these discount opportunities. The performance of the can-order strategy with discount evaluation is compared with that of another class of discount evaluation rules as proposed by Miltenburg and Silver.