Optimal coordination strategies for production and marketing decisions

Abstract

This study develops general optimal coordination strategies for short-term production and marketing decisions, i.e., marketing-dominating coordination approach (MDCA) and production-dominating coordination approach (PDCA). These approaches reflect a general context of coordinating production and marketing decisions through information exchange between the two functions, by solving a first-order nonlinear difference equation iteratively, based on a marginal analysis of the profit function. We show that the MDCA predominant in both practice and academia may not converge to an optimal solution, and suggest an alternative PDCA for this divergent case. Also, we illustrate a coordination strategy by solving a previously unexplored Price-EPQ problem of jointly determining a manufacturer’s profit-maximizing selling price (marketing) and production quantity (production) decisions for a price-dependent demand item with a finite production rate unlike previous Price-EOQ problem studies.