The two-product multiperiod capacity and demand allocation problem

In certain industries, firms are faced with demand for their products vastly in excess of available production capacity. In such situations, a firm can essentially sell everything that it produces. The firm is then faced with the problem of determining the appropriate level of demand of each product and of allocating this demand to different periods of the horizon. This demand allocation decision determines the allocation of capacity to various products within each period. A two-product multiperiod capacity and demand allocation model is developed in this paper. A solution procedure is proposed and the form of the optimal solution is determined for two situations. In the first situation, the firm has control over the sequence of production of various products, while in the second situation, the sequence is fixed and is not under the control of the firm. The results show that operational issues like sequencing must be considered while taking marketing and demand management decisions.