Trade Promotions (Example 11-11)

No PROMO With PROMO

Monthly Demand 10,000 10,000
Fixed Order Cost $ 100 $ 100
Holding Cost 20% 20%
Trade promotion discount 5%
Manufacturer's Sale Price to DO $ 3.00 $ 2.85
Optimal Lot Size w/o promo 6,325
𝑄^𝑑 (𝐶𝑒𝑙𝑙 𝐷10) = 𝑑𝐷/(𝐶−𝑑)ℎ+
Optimal Lot Size w/ promo (Eqn 11.15) 38,236 (𝐶𝑄^∗)/(𝐶−𝑑)
Cycle Inventory 3,162 19,118
Average Flow Time 0.3162 1.9118
Forward Buy 31,912

The optimal order size with the trade promotion discount of Cell D7 is
given by Equation 11.16 in Cell D10. Try different values of the trade
promotion discount (Cell D7) to see its impact on order size in CellD10
and forward buying in Cell D13.
𝐶𝑒𝑙𝑙 𝐷10) = 𝑑𝐷/(𝐶−𝑑)ℎ+
)/(𝐶−𝑑)
Discount Pass Thru (Example 11-12)

w/o discount with discount

Manufacturer's Sale Price to DO $ 3.00 $ 2.85
Optimal Retail price $ 4.00 $ 3.925
Demand 60,000 64,500
The retailer's response is to pass through only $0.075 of the $0.15 discount ot the
customer. The retailer does not pass through the entire discount. At the discounted
price, the new demand is 64,500. This represents an increase of 7.5 percent in
demand relative to the base case. It is optimal for DO to pass on half the trade
promotion discount to the customers. This action results in a 7.5 percent increase in
customer demand.