OR/MS Today - February 2001

February 2001

A Match Made in Heaven

Operations research and the Internet should team up to produce synergistic supply chain management solutions

ManMohan S. Sodhi

Once again, opportunity is knocking on the door of the operations research community, this time courtesy of the Internet. Indeed, the upcoming (March-April 2001) issue of Interfaces is devoted to the use of OR with the Internet; this article relies on material from my paper in that issue [Sodhi, 2001]. Even IT magazines are beginning to mention OR [Anthes, 2000]. The union of OR and the Internet is a match made in heaven. The reason: the Internet provides inexpensive and ubiquitous communication and data access while OR can support strategic and tactical decision-making with the data.

This is especially true in supply chain management, where collaborative planning and product life-cycle management are just two examples of potential Internet and OR synergy. Companies can use the Internet to share forecasts and production plans with their suppliers and customers, and then use OR-based methods to create optimized plans for the near or medium term. The same synergy can be exploited for product life-cycle management. We can use the Internet to support the collection of customer feedback for use in design and to enable designers to collaborate with marketing, production and suppliers. We can also use OR for improving resource utilization during design and for planning the phase-in and phase-out of products.

ERP: A Missed Opportunity

This is not the first time that technology improvement in communication and data access has created opportunities for OR, especially in the area of supply chain management. Companies started implementing enterprise resource planning (ERP) systems in a big way in the early 1990s partly to coordinate transaction data pertaining to orders, inventory and cash. They created opportunities for OR through:

The dramatic improvement in the quantity and quality of data that could be used for OR models;
The scrapping of existing OR models by companies when they implemented ERP systems, erroneously believing that these systems would handle planning; and
The all-too limited planning aspect of ERP software, and planners shifting their attention to medium-term horizons realizing they needed true planning systems.

But OR professionals did not, in general, take advantage of these opportunities. Advanced-planning-and-scheduling (APS) vendors filled the vacuum to some extent using simple (and even simplistic) heuristics to provide supply chain and production planning capability. These vendors included Chesapeake (acquired recently by Aspen Tech), i2, Manugistics, Numetrix (recently acquired by JD Edwards) and Red Pepper (acquired a few years ago by PeopleSoft). They forced ERP vendors to recognize the importance of providing planning functionality and motivated ERP vendors, such as SAP, Baan, PeopleSoft and JD Edwards, to develop or acquire heuristics (and OR technology) to supplement their software.

One could argue that OR is embedded into these tools, but tools are only part of the equation. Companies do not connect the use of these tools with OR expertise and continue to have a poor understanding of these tools. So one could extend the missed ERP opportunity by pointing out the missed APS opportunity as well!

And Now the Internet

Still, as business use of the Internet grows, synergistic opportunities for OR will abound. Firms can use OR and the Internet, among other things, to: 1. improve execution of orders, 2. include their suppliers and customers in planning for the near and medium term, and 3. improve design, sales and customer-relationship-management.

Supply chain-related opportunities for OR continue from the days before e-business became big, but the Internet has opened up several opportunities:

APS vendors and others have announced electronic marketplaces or marketplace technologies to support supply chain planning to help firms plan effectively;
New business models for e-commerce, like that of Webvan, will require new supply chain models;
Business-to-business relationships in electronic marketplaces typically involve more entities, thus creating OR opportunities in marketplaces for both planning and execution;
Businesses are more aware of the value of optimization than they were before APS implementations; and
The possibility of OR and other applications being Internet-hosted means businesses may have fewer IT concerns about implementing OR-based systems.

Improving Execution

Businesses currently use the Internet almost entirely for immediate transactions, but even problems with no planning element offer opportunities for OR because filling customer orders on time necessitates making immediate decisions. For instance, in response to a customer's (unanticipated) request for immediate shipment, a firm could use OR to determine the effects of rescheduling production to fill the order and respond quickly to the customer.

One way of responding to a customer is through available-to-promise technology that gives a customer (or salesperson) a way, usually via the Internet, to find out whether a firm can fill an order by the requested date. If the firm cannot, instead of just replying in the negative, it can use a variant called capable-to-promise to determine whether a change in the production schedule, product configuration, components or shipping location can make filling the order possible. Such tools can use OR models to determine the lowest-cost change to the product, order, delivery date or fulfilling location to satisfy the order.

Besides using OR to modify current orders by substituting components or manufacturing locations, participant firms of B2B electronic marketplaces can use OR for procurement to ensure that they meet their contractual agreements with their partners while procuring from other participants. For instance, participants could use OR to modify planned high-volume purchases from preferred suppliers while buying from other suppliers to respond quickly to market changes.

Transportation and transportation marketplaces on the Internet are a ripe area for use of OR by shipping companies. Indeed, some of the announced transportation exchanges like the Digital Transportation Marketplace (DTM) (Logitstics.com) and FreightWise intend to leverage optimization-based software to match shippers and carriers.

Including Customers and Suppliers for Planning

Even without the Internet, OR allows a firm's planners to extend their decision horizon for planning supplies to meet forecasted demand from the immediate future provided by the ERP system to the medium and long term. With the Internet, planners can include suppliers and customers in their planning models by using the Internet to share forecasts and production plans; this is collaborative planning. With B2B electronic marketplaces, the opportunity to apply OR techniques for planning is even more tangible because the firm's customers and suppliers may be on the same marketplace enabling collaboration (if supported by the marketplace).

Long-term decisions are affected by globalization leading to increased competition and expanded presence in other countries — by mergers and acquisitions, and by the costs of physical assets. Since the 1960s, OR has been used for long-term decisions, such as plant and distribution-center openings and closings; and APS vendors already offer tools that use true optimization with linear and integer programming. The Internet is useful only in that it can facilitate getting data from disparate ERP systems even though only static data are needed. The Internet is also useful for hosting decision-support systems, so that a company does not have to worry about installing software that is used infrequently.

Medium-term decisions are affected by customer service, inventory and supply-chain costs, including procurement, manufacturing and distribution costs. OR can help firms to plan procurement, manufacturing and transportation to minimize supply-chain costs. APS vendors typically support medium-term decisions by offering tools that use heuristics. This is the decision horizon for which collaborative planning can be quite useful.

Short-term decisions are affected by transportation cost, finished goods inventory levels and equipment utilization. OR can help firms create or, on short notice, modify their production schedules and inventory deployment. Modification could be warranted by unplanned events, such as the arrival of a new high-priority order, with real-time data obtained using the Internet.

APS/ERP vendors, including i2, Manugistics, Oracle and SAP, intend to add planning functionality to B2B electronic that will enable participating firms to extend their decision horizons. For example, i2 and Toyota Motor Sales USA announced the auto parts electronic marketplace, iStarXchange, based on i2's tradeMatrix technology, to offer "optimization and hosted services" that include demand planning and procurement planning. SAP and six chemical companies announced their intention in March 2000 to use both SAP's ERP software (R/3) for transactions and APS software (APO) for planning on mySAP.com.

Improving Design, Sales and Customer Relationship Management

Internet-based communications also give rise to opportunities for OR to improve design, product life-cycle management and the interface with the end-consumer. Business drivers are:

pressure from consumers and industrial customers to customize products to their individual specification,
ready access for consumers to competing Web sites,
products' decreased time to market,
shortened product life-cycles; and
business customers' expectations for improved service.

Firms can use OR in:

design, by optimizing product attributes, by improving the use of design and development resources, and by planning the phase-in of new products and the phase-out of old products. Analysts can use customer data collected in Web surveys to determine desirable product characteristics quickly and improve product designs. Planners can access design and capacity information over the firm's intranet or extranet to plan for improved resource usage.
sales, by predicting demand at the individual and aggregate levels more accurately than would be possible otherwise, and by deploying inventory effectively to meet changing demands. Analysts can analyze data on Web site visitors' navigational paths to predict sales at the individual customer level. They can also predict aggregate sales and redeploy inventory if needed.
customer relationship management (CRM), by designing call centers and other service center facilities to improve service and to better use resources. CRM permits managers to integrate existing and new channels to support customers, sales and marketing. These managers can use OR strategically to design call centers and to integrate their customer-relationship infrastructure and resources. They can use OR tactically to deploy algorithms to aid in automated and customer-service-representative-aided responses to customer requests.

The large amount of consumer data collected by retailers combined with firms' desire to target individual customers has spurred the growth of data mining. Web sites are collecting further data as users navigate around them. This has motivated development of OR-based tools for predicting individual consumers' purchasing behaviors in real or delayed time, leading to improvements in forecasting and inventory deployment.

Collaborative filtering is a way to establish what ads to display to Web users who have browsed some ads or made purchases (for example, www.acm.org/siggroup/collab.html). Collaborative-filtering software compiles purchasing information on customers to pool them into clusters and uses some cluster members' purchasing patterns to predict the buying habits of others in the same cluster. It does this in real time and, for instance, puts an ad on the customer's screen while he or she is making a purchase.

Personalization is the real-time or delayed modification of Web sites to display content or ads for products and services that may likely interest individual users. Collaborative filtering is one way to achieve this, but other methods include Markov chain models.

Clickstream analysis is collecting and analyzing users' navigational paths on Web sites, mining the data they create. Analysis at an aggregate level can be useful for improving Web site design. Analysis at the individual level can be useful for personalizing.

Some companies that provide tools and services in this area are DoubleClick (advertising management), Vignette (automated delivery of content), Net Perceptions (real-time personalization), net.Genesis (mining customer data), HNC Software (software to predict customer behavior), IBM (decision support and advanced data mining), Quadstone (for predicting customer purchases) and WebTrends (analyzing marketing campaigns).

Product life-cycle management (PLM) includes: 1. collecting customer feedback to use in designing or improving products, 2. enabling designers to collaborate with marketing, production and suppliers, 3. improving resource utilization during design, and 4. doing what-if analysis for planning when to phase products in and out. Software to support PLM can use Internet technology to facilitate the first two processes, and can use OR techniques for the second two. Vendors have already announced software to support PLM. i2's PLM solution comprises heuristics and Internet-based collaboration modules to cover the product-development and product life-cycle processes from design to phase-out. SAP's PLM capabilities (www.sap.com/plm) include Web-enabled collaboration and APS-supported management of design and development using its tool, APO. The intention is to manage the complete product life-cycle of the extended supply chain from design and production through sales and maintenance.

Customer service applications with which customers serve themselves to obtain technical or sales information on Web sites or through automated e-mail responses also provide opportunities for OR. Firms have an economic incentive to offer self-service: the cost of automated or Web-based resolutions to customer queries is one-tenth that of resolutions provided by customer service representatives on the telephone. Existing applications reportedly use expert systems, knowledge engineering and case-based reasoning. These applications typically respond to e-mail or assist customer-service representatives by matching queries with knowledge bases that include both content and rules for routing and problem escalation. For instance, the software may react to a customer's e-mail by deciding that the customer is reporting a problem. It could then respond by searching through the knowledge base for information that it considers of potential use to this customer and then e-mailing it to him. It could also route the original e-mail message along with its response to a specific engineer to follow up. Examples of software companies with products in this area are Edify, Inference, Silknet and ServiceSoft.

Conclusion

As with any good marriage, the partners should be able to stand by themselves but reach their potential by being together. Indeed, there are many benefits that OR brought to supply chain management before the commercial use of the Internet. The Internet, too, has bought huge savings to companies, e.g., through e-procurement, without any OR use. And much of the potential for either is still untapped. There is one difference between the two, though: The Internet has the complete attention of managers while OR has little. So the synergistic opportunity with the Internet is OR's to lose. OR professionals can either bring out the harmonicas and play nostalgic blues about the "good old OR days," or, take a long loving look at the Internet and say "I do."

References

Anthes, G. (2000), "Optimal results," Computerworld, Vol. 34, No. 47, Nov. 20, pp. 60-61 (available at www.computerworld.com/cwi/story/0,1199,NAV47_STO54157,00.html on Nov. 27, 2000)

Sodhi, M., (2001), "Applications and Opportunities for Operations Research in Internet-enabled Supply Chains and Electronic Marketplaces," Interfaces, forthcoming in Vol. 31, No. 2, March-April 2001.

Dr. ManMohan S. Sodhi is director of enterprise e-business strategy with Scient in Chicago. He is president of the Logistics Section of INFORMS, the founder of the OR news group, sci.op-research, and helped design and create INFORMS Online. He welcomes your comments at MohanSodhi@AOL.com.

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