Resource allocation in a large decentralized enterprise

We present a model of an enterprise comprising several operating units pursuing their production goals with a fair degree of autonomy, but under resource constraints imposed by a headquarters function. Specifically, each operating unit is assumed to seek a maximization of a perceived market value of its product output, subject to constraints on resources such as capital for plants and equipment, headcount, etc. imposed by headquarters. The headquarters function pursues a global optimization problem which takes into account the market values of all the products of the operating units, but also the cost of the resources and their regulation. Under suitable assumptions of linearity, the operation of the enterprise is formulated as a novel hierarchical structure of linear programming problems. An algorithm is presented for the solution of a class of such problems. © 1987.