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OPERATION RESEARCH-

THE SCIENCE OF BETTER DECISIONS  

Because operations research can make and has made contributions in virtually all industries, in almost all managerial and decision-making functions, and at most organizational levels, the list of past and prospective applications is prodigious. To sample from the application universe, let’s briefly look at O.R. in major business functions (finance, production, and so on), and then consider some applications that cover multiple functions (such as revenue management and supply chain management).

This sampling of applications won’t try to go industry by industry. All industries contain many good opportunities to benefit, including industries that might at first seem unlikely clients – e.g., agriculture, health care, broadcasting, entertainment, and sports.

THE SCIENCE OF BETTER DECISIONS 

Here are selected business functions, with a few comments about O.R. applications in each:

Board room and senior executive offices

Top-level, high-impact policy-setting and decision-making offer companies especially great potential to gain competitive advantage. The power of O.R. to reveal the implications of different courses of action, and to find a preferred course of action among numerous possibilities, goes far beyond that of ordinary spreadsheet analysis.

Senior-executive applications include, for example, mergers and acquisitions, major expansions, divestitures, valuation of companies or operating units, facility location, and redesign of the entire supply chain. In companies that operate through large contracts, the ability of O.R. methods to help them with price setting and risk reduction in competitive bidding are keys to gaining an edge.

O.R. techniques make it possible to quantify risk, always vital information but seldom quantified in executive offices. O.R. methods also can quantify and balance other qualitative aspects normally thought to be beyond the reach of analysis. In addition, some O.R. methods help with gathering and displaying inputs from different executive participants, and with building buy-in to the final decision.

Many excellent applications come to the top-executive level. Even a slight percentage improvement beyond what the ordinary analysis discloses will produce a significant payoff for the company. Often the improvement is so substantial that it makes a critical difference.

Manufacturing and service operations, distribution, transportation, telecommunications

The “operations” in operations research suggests that this application category is the original home of O.R. That’s not quite correct, because the name comes from military operations, not business operations. Nevertheless it’s true that O.R. successes in contemporary business pervade manufacturing and service operations, logistics, distribution, transportation, and telecommunications.

The myriad applications include scheduling of all kinds, routing, improvement of work flow and elimination of bottlenecks, inventory control, business process reengineering, site selection, greenfield facility planning, and general operational planning. Two growing applications that are distinguished by their use of several methods to cover several functions – revenue management and supply chain management (both discussed below) – are in this realm.

THE SCIENCE OF BETTER DECISIONS 

Manufacturing companies make heavy use of simulation. Transportation and telecommunication companies make heavy use of optimization. In fact, most O.R. methods are well exercised throughout this arena.

The names operations analysis and operations management often appear as synonyms for O.R. in operations.

Finance and control

The core financial applications occur in investment, lending and borrowing, financial planning, and insurance. Financial institutions have these, as well as applications in their operations. In a manufacturing or service company, the applications are those within the domain of the chief financial officer.

Mathematical models, signatures of O.R., have become common in finance. Much publicity surrounds the investment applications, especially in connection with newer investment media like financial derivatives. The index fund was invented by O.R. people. So were key advances in investment performance measurement. But past and prospective O.R. successes cover a much wider range, including company financial projections and forecasts, valuation of companies and product lines, selection of corporate borrowing vehicles, hedging, foreign currency analysis, treasury operations, analysis of taxes, asset and liability management in commercial banks, and credit approval.

The name financial engineering is popular these days. That name typically serves as a synonym for O.R. in finance. The Wall Street version of the name rocket science usually means O.R. in investment.

Marketing

As in finance, in marketing the opportunities to gain a competitive edge through quantitative analysis are multiplying. Those opportunities arise, first, in strategic marketing. Strategic applications include general planning, sales forecasting, market selection, market measurement, segmentation and targeting, and product portfolio analysis. Other opportunities present themselves in tactical marketing. They include decisions about pricing and promotion, salesforce sizing and deployment, location of distribution facilities, advertising, and product design.

You’ll find these applications in manufacturing and service companies. Comparable applications are found in pure marketing firms, including ad agencies and market research companies.

Paralleling the name financial engineering is the currently popular name marketing engineering, which ordinarily means O.R. in marketing.

THE SCIENCE OF BETTER DECISIONS

Information technology

The impact of O.R. on IT is growing. The top IT job in most companies soon may require a strong background in O.R.

For many years computer-vendor executives have been saying that the real payoff from computerization is the ability of computers to produce crucial management information. O.R. is the field dedicated to creating the content of management information. O.R. brings the best methods to bear on deciding what input data to collect, how to convert raw input data into valuable, decision-guiding information, and how to present that information for greatest managerial usefulness.

O.R. is behind a growing number of IT buzzwords. Among them are decision support systems (DSS), online analytical processing (OLAP), and optimization components (along with other analytical components) of enterprise resource planning systems (ERP) and of e-commerce systems. Generally, O.R. furnishes the expertise needed to develop management oriented software-and-communication systems with analytical content, such as shop floor planning and scheduling systems, data mining systems, intelligent pricing (revenue management) systems, supply chain management systems, and real-time command and control systems.

Because O.R. work is so closely connected to computers and data communication, O.R. and IT professionals often become partners in projects.

Human resources

The military services apply O.R. extensively for personnel planning and related HR purposes. While not as many HR applications in business have been made known outside client organizations, the opportunities, where choices are made in complex situations, are increasing. The most likely topics include analysis of retirement plans and other benefit plans, compensation studies and compensation planning, compliance with regulations, and reduction of travel expenses.

Legal

A classic O.R. application is deciding how best to proceed in a large-dollar legal action. The O.R. method called decision analysis is perfect for sorting out and correctly weighing the many uncertainties and contingencies in this situation.

O.R. professionals also may provide the expert analysis of quantitative data sometimes needed to prepare for court cases.

THE SCIENCE OF BETTER DECISIONS

Engineering

Such O.R. techniques as decision analysis, the analytic hierarchy process, and mathematical programming, can assist with engineering decisions – for example in making choices in design and in testing.

The engineering professions make heavy use of linear and nonlinear programming, developed by the O.R. community. For example, those optimization methods are commonly employed to help manage oil refineries.

Research and development -

The classic R&D application is selecting the research portfolio – that is, deciding how much to invest in each of the possible R&D projects.

Revenue management

Turning now to a different view of applications, let’s consider some that involve multiple functions (and often multiple O.R. methods). We’ll begin with a currently hot topic: revenue management.

Also called yield management (praised by former CEO Bob Crandall of AMR, above), revenue management entails accurately forecasting demand and then adjusting prices over time to more profitably allocate fixed capacity. You might term this super-intelligent pricing. It shares much in common with the application of competitive bidding. Developed originally for pricing and booking of airline seats, the approach has spread to hotels, rental car firms, broadcasting, and more recently to manufacturing.

Supply chain management

Supply chain decisions dictate the who-what-when-where all the way from purchasing and transporting materials and parts, through manufacturing products, and finally distributing and delivering products to customers. The prime management goal might be to reduce overall cost – very large in many companies – while filling customer orders even faster than before.

The power of O.R. methods makes it possible to examine this complex chain comprehensively, and to search among a huge number of combinations for those that seem most beneficial.