A hierarchical optimal control model for co-ordination of functional decisions in a firm

An optimal control model of a joint finance-marketing-production system is formulated. The marketing subsystem in the model is represented by the Nerlove-Arrow model of advertising and the production subsystem is represented by the HMMS model of production planning. Using the model as a reference point, a decentralized procedure for coordinating finance, marketing and production decisions is designed. The procedure appears to have the following two characteristics: (1) a discontinuous discount interest rate and (2) a time-varying transfer price between marketing and production functions. An example is presented to illustrate the procedure. The case of sequential planning of marketing-production and finance decisions is considered and the resultant marketing-production subsystem model is described. A solution procedure is outlined for the subsystem model.