Optimal ordering policy in response to a temporary sale price when retailer's warehouse capacity is limited

Abstract

In this paper, we investigate the possible effects of a temporary price discount offered by the supplier on the retailer’s replenishment policy under the premise that the capacity of the retailer-owned warehouse is limited. The purpose of this study is to develop a decision process for the retailer, which allows he/she to decide whether to adopt a special or regular order policy during a temporary sales period. For the case where a special order policy is selected, the optimal special order quantity by maximising the total cost saving between special and regular orders is determined. The model is developed when the temporary sales period coincides with one of the following: 1 the retailer’s replenishment time 2 the retailer’s sales period. Furthermore, we present useful results to characterise the optimal solutions. Finally, several numerical examples are given to illustrate the theoretical results, and a sensitivity analysis of the optimal solution with respect to the main parameters is also conducted.