Optimal Transition Ordering Strategies with Announced Price Increases

Abstract

Should an organization modify its ordering policies when a supplier announces an impending price increase for an item? Announced price increases are a common economic phenomenon. This article develops the optimal stock replenishment strategies in response to a price change. It is shown that the optimal response depends on the number of order cycles before the price change becomes effective. The potential cost savings can be substantial. The familiar model for determining the optimal stock replenishment strategy for an impending price increase assumes a buyer has limited replenishment opportunities before the increase. This paper extends the model to include multiple replenishment opportunities. Optimal replenishment strategies are developed for any length of notification period and cost savings are identified.