Integrated market selection and production planning: complexity and solution approaches

Emphasis on effective demand management is becoming increasingly recognized as an important factor in operations performance. Operations models that account for supply costs and constraints as well as a supplier's ability to in°uence demand characteristics can lead to an improved match between supply and demand. This paper presents a new class of optimization models that allow a supplier to select, from a set of potential markets, those markets that provide maximum profit when production/procurement economies of scale exist in the supply process. The resulting optimization problem we study possesses an interesting structure and we show that although the general problem is NP-complete, a number of relevant and practical special cases can be solved in polynomial time. We also provide a computationally very effcient and intuitively attractive heuristic solution procedure that performs extremely well on a large number of test instances.