The effects of quantity discounts on supply chain performance: Looking through the Bullwhip lens

Abstract

Quantity discounts are a common pricing mechanism to stimulate large orders. We explore their impact on the dynamic behaviour of production and distribution systems by studying key operational and economic metrics. In a three-echelon supply chain, we observe that the discount generally increases the Bullwhip Effect, which especially harms the manufacturer. The discount also reduces the retailer’s purchase costs, but increases its inventory- and capacity-related costs. A key trade-off thus emerges, which manifests itself through a U-shaped relationship between the total cost and the discount acceptance parameter. In the light of this trade-off, we discuss how key factors should affect the retailer’s willingness to pursue the discount. We observe that managers that need to deal with tougher environmental conditions, such as high demand uncertainty and long lead times, should be less reluctant to increase orders up to the discount quantity. We also discuss in detail other valuable insights for professionals, both from the perspective of sellers and buyers.