A two-level planning procedure with respect to make-or-buy decisions, including cost allocations (Q1067973)

The paper is concerned with a two-level corporate model. At the lower level, divisions produce for the external market. They require certain technical services. The divisions are coordinated by a central unit at the top level. The central unit must determine the integral plan of technical services i.e. firm-wide optimal make-or-buy decisions, without having complete information on the divisions. We present a decomposition-based planning procedure during which the central unit gathers information to derive an optimal make-or-buy decision while allocating the costs of internal technical services. The model formulation has substantial significance for the real world: A similar organizational structure, information dispersal among subunits and coupling of divisions and departments is commonly observed in existing firms. The resulting planning procedure can be interpreted in terms of planning and budgeting in real organizations.