Suppliers provide incentives to buyers to acquire more of a product by offering trade promotions. A trade promotion is analogous to a consumer promotion with the former offered in a channel of distribution by one firm to another and the latter in a channel where a retailer offers a promotion to a consumer. As with a consumer promotion, a trade promotion specifies terms of the discount in terms of price (e.g., a 5% reduction per case ordered), location (e.g., Spain), duration (2 weeks starting from September 1), and productsuch as a specific set of SKUs. There are a number of reasons why manufactueres utilize trade promotions including: (1) manufacturer forecast error which results in excessive inventory; (2) pushing inventory onto the next level of the channel; (3) response to competitor actions; and (4) through retail tie-ins, inducing retailers to offer more product support at the retail level. The basic EOQ model can be modified to account for a temporary trade promotion: $\! \mbox{EOQ}^{\mbox {dis}}=\frac{dis\cdot D}{(v-dis)h}+\frac{v\cdot EOQ}{v-dis}$

Where:

• EOQ = economic order quantity
• D = demand
• K = fixed order cost
• dis = the discount, expressed in relevant monetary units
• v = value of unit of inventory, expressed in relevant monetary units
• $\,\!\mbox{EOQ}^{\mbox{dis}}$ = EOQ after taking taking into account the trade promotion
• c = inventory carrying cost rate
• h = inventory carrying cost rate per unit per relevant time period
• If D is expressed annually, then h = c × v

## Example

Suppose a manufacturer sells a product to a retail with a standard price (v) of €5. The retailer's inventory carrying cost rate is .20 (c) and fixed cost to place an order (K) is €10. Annual demand for the product (D) equals 5,000 units. The manufacturer offers a 10% discount of €0.50. How much should the retailer order to take advantage of the discount?

The first step is to evaluate the EOQ. $\mbox {EOQ} =\sqrt{\frac{2KD}{h} } =\sqrt{\frac{2\cdot 10\cdot 5000}{.20\cdot 5} } =316 \mbox {units}$

Next: $\! \mbox{EOQ}^{\mbox {dis}}=\frac{dis\cdot D}{(v-dis)h}+\frac{v\cdot EOQ}{v-dis}=\frac{.50\cdot 5000}{(10-.50).20}+\frac{10\cdot 316}{10-.50}=1,648$ $\,\!\mbox{Forward buy}=\mbox {EOQ}^{\mbox{dis}} - \mbox {EOQ}=1,48-316=1,332$