Optimal supplier choice with discounting

Abstract

This paper investigates a model for pricing the demand for a set of goods when suppliers operate discount schedules based on total business value. We formulate the buyers's decision problem as a mixed binary integer program, which is a generalization of the capacitated facility location problem (CFLP). A branch and bound (BnB) procedure using Lagrangean relaxation and subgradient optimization is developed for solving large-scale problems that can arise when suppliers’ discount schedules contain multiple price breaks. Results of computer trials on specially adapted large benchmark instances of the CFLP confirm that a sub-gradient optimization procedure based on Shor and Zhurbenko's r-algorithm, which employs a space dilation in the direction of the difference between two successive subgradients, can be used efficiently for solving the dual problem at any node of the BnB tree.