Decision Sciences Journal
Volume 32, Number 1
Winter 2001
Lot-sizing Decisions Under Limited-time Price Reduction
Ranga V. Ramasesh
Neeley School of Business,Texas Christian University, Fort Worth,
TX 76129,
email: r.ramasesh@tcu.edu
Ram Rachamadugu
College of Business Administration,University of Toledo, Toledo,
OH 43606
ABSTRACT. We consider the optimal lot-sizing policy
for an inventoried item when the vendor offers a limited-time
price reduction. We use the discounted cash flow (DCF) approach
in our analysis, thereby eliminating the sources of approximation
found in most of the earlier studies that use an average annual
cost approach. We first characterize the optimal lot-sizing policies
and their properties, then develop an algorithm for determining
the optimal lot sizes. We analytically demonstrate that the lot
sizes derived using an average annual cost approach for the different
variants of the problem are, in general, larger than the DCF
optimum. While DCF analysis is more rigorous and yields precise
lot sizes, we recognize that the associated mathematical models
and the solution procedure are rather complex. Since simple and
easy-to-understand policies have a strong practical appeal to
decision makers, we propose a DCF version of a simple and easy-to-implement
heuristic called the “Early Purchase” (EP) strategy
and discuss its performance. We supplement our analytical developments
with a detailed computational analysis and discuss the implications
of our findings for decision making.
Subject Areas: Heuristics, Inventory Management, Inventory
Theory, Lot-sizing, and Purchasing. |