June 2000 The Science of Smart Decisions Making operations research a core business competency By Harlan P. Crowder Operations research and management science involve using mathematical modeling and statistical methods to help people analyze complicated business processes and make good decisions. These techniques are especially useful for helping understand and deal with business complexity and uncertainty. In the 21st century business climate, complexity and uncertainty are at an all-time high: the electronic economy requires managers and executives to make better and faster operational and strategic decisions; globalization and the Internet are shifting and redefining relationships with customers, suppliers, partners and competitors; and the lowest unemployment rate in two generations is taxing the ability and imagination of companies to find, train and retain workers and managers. In this fast-paced and hectic environment, the role of operations research (OR) is increasingly viewed as a vital and necessary function for helping analyze and run a business. Few CEOs today would try running a Fortune 500 company without a product design or strategic planning organization. In the future, OR expertise and technology will be standard components of successful enterprises for helping managers and executives understand complicated business issues and make smart decisions. The question is, What should be the relationship of OR capability and expertise within an enterprise? Should the company outsource OR requirements to consultants or business partners? Or should this capability be a core competency, with OR expertise residing within relevant company organizations? The objective of this article is explore the various roles of OR within a company, outline conditions that indicate when OR expertise should be integrated into the enterprise, and give some guidelines about how to start building OR capability in your company. The Role of OR in 21st Century Enterprises Operations research methods and technologies have traditionally played an important role in business areas such as supply chain planning and logistics network design and operation. In the future, OR will help companies deal with a broad range of new business challenges. The increased complexity of running a successful business. Many large companies with complex business processes have used OR for years to help executives and managers make good strategic and operational decisions. American Airlines and IBM have incredibly complex operations in logistics, customer service and resource allocation that are built on OR technologies. As the trend of increased business complexity moves to smaller enterprises, OR will play vital operational and strategic roles. New opportunities in the electronic economy. The Internet and telecommunications revolutions will increase the requirement for OR analytic decision tools. The idea of a static supply chain — materials supply, product manufacturing, multichannel distribution and product sales — will give way to customized, one-off, built-on-the-fly virtual supply chains. The necessary components will be brokered and assembled as needed, the configuration, functionality and price dictated by application requirements and the market. Lots of information, but no decisions. Enterprise resource planning systems and the Web have contributed to a pervasive information environment; decision-makers have total access to every piece of data in the organization. The problem is that most people need a way to transform this wealth of data into actionable information that helps them make good tactical and strategic decisions. The role of OR decision methods is to help leverage a company's investment in information technology infrastructure by providing a way to convert data into actions. The role of OR is continually expanding with new and innovative applications. For example: A leading provider of broadband telecommunications services is designing and installing a nationwide fiber optic network for carrying digital information. They foresee the day when digital communication will be too cheap to meter; the company's business will involve selling services around the communications capacity. This company is using OR methods for planning how to build and allocate resources for serving new communications-based businesses and communities that will not even exist for another five or 10 years. A large nationwide bank is using OR techniques to configure complicated financial instruments for their customers. A process that previously required a human agent and took minutes or hours to perform is now executed automatically in seconds on the bank's intranet. And the resulting financial products are far superior to those produced by the manual process. A major retail enterprise is using OR methodology for making decisions about customer relationship management. They are using mathematical optimization to achieve the most profitable match between a large number of customer segments, a huge variety of products and services, and an expanding number of marketing and sales channels such as traditional direct mail, call centers, narrowcast TV, Internet and e-mail. OR expertise: Outsource or Build into the Business? The standard management mantra is, "If it's not a core competency, outsource it." So the question is, should OR be considered a core competency in your business and, therefore, you need to build up the technology and expertise? Or can it be outsourced to a consultant or business partner? This complicated issue can have strategic implications. In order to gain some perspective, here are several questions that will help determine the level of OR requirements for an organization or company. What will your company look like in three years? Pretty much like today? Or will it be unrecognizable to today's employees, customers and shareholders? Several years ago, the red-hot management and consulting buzzword was "Business Process Reengineering." We don't hear much about BPR anymore because, for many companies, it has become a way of life. Many organizations and enterprises are continually reinventing and reengineering themselves in response to new technologies, customers and markets. A company undergoing continual organizational and business flux should have OR as a core competency. Think of OR as a wind tunnel for business: it lets you experiment with business ideas and designs, using computer models to inexpensively "test fly" new processes in the laboratory before they are committed to the expensive and unforgiving real world. A company today that anticipates having the same organization, market strategy and business model for the foreseeable future probably doesn't need OR as a core competency. It needs help in planning its bankruptcy strategy. Is your company rapidly expanding its operations, marketing and sales channels, adding new touch points with customers, suppliers and partners? Or is the telephone and fax machine going to be fine for now? The Internet and other new technologies have significantly expanded our ability to conduct business in new and exciting ways. New partners — and competitors — are popping up in places you didn't know existed, let alone how to pronounce. Electronic disintermediation is reducing the friction of commerce and squeezing out the middleman; great news, unless of course, you happen to be the middleman. But this shift to wider business bandwidth has a problem: which combinations of new communications channels are best for customers, suppliers and partners? Especially for marketing and sales, the promise of low-cost touch points is compelling, but how should these new tools be combined and used over time in order to maximize the profit potential? We are seeing a wide array of new OR applications that focus on how to use new business methods and technologies. Applications such as brokering, auctions, dynamic pricing, horizontal marketing and the best use of electronic commerce portals all have underlying mechanisms that can be better understood and made more effective and efficient using OR analysis and techniques. If your company is expanding its reliance on new mediums for connecting with your customers, suppliers and partners, then you will increasingly benefit from the analysis and insight offered by OR technology and expertise. Are you an "Old Economy" 20th century company struggling to adapt to the 21st century "New Economy"? There is lots of attention these days on the bright stars of the New Economy, the purveyors of information that deliver precisely ordered streams of electrons to their customers. They don't need heavy machinery, trucks and fuel, and big warehouses for their supply chains. Inexpensive plastic disks or, increasingly, a direct link to the Internet, is the only element of their distribution channel between enterprise and customer. But most companies are Old Economy; they still design, build and deliver physical, molecular-based products to customers. At the end of the day, they still must build volume-filling commodities at a geographic location, and move products from point A to point B with trucks, trains, planes and ships. These enterprises still have planning, scheduling and logistics problems, and no technological breakthrough will change that fact. The good news is that Old Economy companies are rapidly adopting the electronic and information technologies of the New Economy for making operational and strategic decision-making more efficient and effective. Combining OR technologies with electronic trading communities and Internet-based enterprise planning systems are revolutionizing the way producers and distributors do business, blurring the value boundaries between manufacturers, suppliers, customers and partners. Skills and Talents of an OR Practitioner Regardless of the organizational positioning of OR in a company — in-house as part of the enterprise or outsourced to consultants or business partners — the people that practice the science and craft of OR have distinctive knowledge and talents. The three discussed here are: 1. the ability to build computer-based OR business models; 2. the need for business and application domain knowledge; and 3. good communication skills. Operations research is all about building mathematical models. A good practitioner must be able to understand the characteristics and attributes of a complicated business process and then have the ability to abstract and translate the salient points into a mathematical optimization or simulation model. Most people with a basic understanding of high school mathematics can be trained to transform business objectives and processes into a mathematical framework. A good OR practitioner also knows how to separate important aspects of a business process from the irrelevant distractions. Operations research is a horizontal problem-solving technology that is applicable to a wide range of processes within a business, and cuts across many industries such as manufacturing, transportation, finance and health care. No one person knows the details of all business processes that are applicable for OR applications. Therefore, for a good OR person to be effective, he or she must be a quick study in learning the details of a business. Knowing the business on Day One is not a requirement; having the ability to quickly "get it" is. It is always surprising how OR techniques and models that a practitioner has used in one area of application will reappear in an entirely different industrial application setting. Even though an OR expert may not know your company's business in detail, he or she may have sophisticated tools and techniques that are applicable for helping you solve complex and difficult problems. Finally, a good OR practitioner needs to know how to communicate with a diverse range of people within an enterprise. The guy on the shop floor may have insights that can be used by the OR expert to build the right business model; the COO needs an explanation of the fine points and nuances of nonintuitive but important results computed by an OR application. Practicing good operations research means practicing good communications. Sources of OR Talent for Your Company The channels for finding the right OR candidates for your company include: The Institute for Operations Research and the Management Sciences (INFORMS) is the primary professional organization for OR practitioners. They have an effective program for helping link OR experts with prospective employers. For more information, see www.informs.org. Some professional recruiters specializing in technical fields have expertise in helping place OR practitioners. For example, Smith Hanley Associates and Analytic Recruiting Inc., both in New York, have recruiters who understand the requirements of companies seeking OR expertise. (See www.smithhanley.com or www.analyticrecruiting.com) INFORMS also has information on professional recruiting organizations. Finally, a good way to find an operations research specialist for your company is to hire an OR consultant who has good contacts in the OR community. The consultant can quickly determine the range and level of problems that need to be addressed in the enterprise, and then help you find the right person to solve problems and is compatible with your organization. Using Science to Help Make Decisions At the end of the day, managers and executives still make the decisions. The role of OR is to augment the decision-making process with an analytic framework for helping deal with complexity and uncertainty. In the 21st century, no aircraft manufacturer would dream of bringing a new aircraft to market that had not been modeled and simulated on a computer. Similarly, no business executive should dream of making a strategic decision with major impact on the corporation until that decision has been modeled and validated using operations research technology. Harlan P. Crowder (harlan_crowder@hp.com) is a Senior Scientist at Hewlett-Packard Laboratories in Silicon Valley, Calif. Table of Contents OR/MS Today Home Page OR/MS Today copyright © 2000 by the Institute for Operations Research and the Management Sciences. All rights reserved. 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