Integrating marketing and production decisions

Abstract

The problem of determining economic production policy has been extensively discussed in the Management Science literature [see Peterson and Silver (1979) Starr and Miller (1967), Hadley and Whitin (1963)] under various conditions and assumptions. Recently researchers have shown an interest in the study of production-inventory systems under varying marketing conditions like the frequency of advertisements, the effect of price elasticity etc. Ladany and Sternlieb (1974) consider the effect of price elasticity in demand. Subramanyam and Kumaraswany (1981) consider the effect of price elasticity as well as the frequency of advertisements on the demand. However, they assume a linear relationship between the demand and the frequency of advertisements. In this paper, we develop an integrated net profit model incorporating price elasticity, frequency of advertisements and the batch quantity. We propose a fast converging iterative procedure for determining the economic operating policy. The net profit model is based on the following assumptions: 1. The demand for the product is assumed to be at a uniform rate over time. 2. The advertisements are placed at equal time intervals. 3. Shortages are not permitted. 4. The items produced in a batch are put into the inventory only at the completion of a batch. 5. Time horizon is infinite. 6. Maximization of the net profit per unit of time is the objective. NOTATIONS