Edelman Award
Is There Life After Edelman?
Analysis of former finalists reveals OR/MS is alive, well and hard at work long after the award presentations
By Peter C. Bell, Chris K. Anderson and Stephen P. Kaiser
The Franz Edelman Award Competition is recognized as a showcase for the very best applications of operations research/management science. The finalists in the competition have been judged to represent the year's most effective examples of OR/MS practice. All finalist applications have been subject to verification through an independent assessment of the impact of the work as viewed by upper management. At the time of the Edelman competition presentations, the finalists represent a group of OR/MS applications that have had a significant impact on their client organizations.
But what happens after the Edelman competition? Do these applications continue to prosper, or do they wither and die? Can OR/MS practitioners learn anything by studying the fate of these works? We set out to find the answers.
We selected the entire private sector Edelman finalist applications published in Interfaces between 1990 and 1997. We chose 1997 as the cut-off because these applications were presented in the spring of 1996, providing at least five years of post-Edelman history. One application, the Columbus-America Discovery Group project, which used OR/MS to successfully locate a sunken treasure ship, was excluded from further study. We were interested in investigating the post-Edelman life of these applications, and the firm involved with this very successful project had no post-Edelman life.
Thirty-two applications from 28 corporations were 1990-1997 Edelman finalists. Interviews were conducted with representatives familiar with each application. We generally started with the authors of the Interfaces article, who were typically consultants or academics, and followed a "trail" to determine those who were working in the company today who were familiar with the application or its fate. In some cases we spoke with four or five people familiar with an application; in other cases we spoke to several people (who we think should have known) but could find no sign of the application. The interviews were taped, transcribed and studied. Here are some of our findings.
Corporations Change
Perhaps our major finding has to do with the turmoil in the corporate world during the last decade. OR/MS people may remember, and perhaps talk about, important applications in Bellcore, Harris Semiconductor, AT&T Capital Corporation, NYNEX or GTE, but these names will not impress today's MBA students. These companies are gone. Bellcore was acquired by Science Applications International Corporation and became Telcordia Technologies; Harris Semiconductor became Intersil; AT&T Capital was sold to Newcourt Credit, which was subsequently acquired by The CIT Group; and NYNEX was acquired by Bell Atlantic, which subsequently merged with GTE to become Verizon Communications. About a third (10 of 28) of finalists have gone through a change of ownership. Even if ownership remains the same, management reorganizations are very common; we could only identify seven firms where we were confident that the same management team was still running the company.
Each change of ownership or reorganization is usually accompanied by a change of management, and this can be very disruptive to OR/MS work. New people with different agendas may replace management that was aware of the work and its importance, or may have championed OR/MS at the Edelman competition. As a result, the OR/MS work may stagnate or even be set aside. ABB Electric President Dan Elwing was a major supporter of OR/MS, but with his departure the new group set aside the very successful OR/MS activities that had resulted in ABB having both the highest quality product and the lowest manufacturing cost.
In some cases, the OR/MS work may have even precipitated a takeover. Vilpac's OR/MS engineered systems integration was highly successful in streamlining the business and helping to increase production from eight trucks a day to 42 a day over three years. Vilpac became so successful that it was bought by Kenworth Truck Company, but the new management team was not comfortable with the optimization tools and does not appear to be supporting any further OR/MS work.
There is Good News for OR/MS
Our study contains a great deal of good news for OR/MS. The great majority of these companies still use these applications (21 of 25) which continue to perform to operational and financial expectations (24 of 26). (The reported population size, which is the number of relevant applications that we were able to categorize with some confidence, varies. Not all questions are relevant to all projects; for example, there is no point considering whether an application designed to solve a one-time problem is still in use. Even after talking to several people about a given application, we could not confidently place all of them in the specified categories.) Most have been further developed since the award competition (21 of 24) and the success of these applications has led to the implementation of additional OR/MS applications (19 of 24).
Sabre, Delta Airlines and IBM are included in this sample and so it should be no surprise to learn of some of these continuing successes, but there are also some less identifiable examples such as Merit Brass, Yellow Freight, and Proctor and Gamble.
Merit Brass, a plumbing supplies manufacturer/distributor, installed a forecasting and inventory management system. In the Edelman article, savings at Merit Brass were estimated at $200,000 annually, but this was determined by the timing of publication. After implementation, inventory kept coming down while service levels on class-A items went from 74 percent to 98 percent. Eventually $6 million was eliminated from the $16 million inventory, for conservative savings of $1 million annually. Immediately after the implementation, sales started to grow rapidly (from $32 million annually to $45 million to $50 million). Management offers many reasons for the rapid growth, but it is eminently plausible that customers noted the service improvements and responded. The cost of the initial OR work was estimated at $78,000.
Not surprisingly, Merit called in the consultant to do a variety of additional projects, including a warehouse "quick pick" line to assemble 250-350 smaller orders per day. The original project and others that have followed have changed the culture of this company. Merit Brass is now "fact-based decision makers." They don't always do everything the numbers say, but first they "pound the numbers" so that they know what they say, and then they formulate action plans from that point.
Yellow Freight's Edelman entry featured "SYSNET," a basic part of Yellow's load planning model. This application has now been taken "at least a generation above the level" in the article into a virtually real-time control system for line-haul operations, and is now part of Yellow's strategic planning and tactical day-to-day planning. "There is very little that gets changed without having a SYSNET look at it."
Since the Edelman presentation where Proctor and Gamble reported on a North American supply chain re-engineering project, there have been significant resources devoted to OR/MS at P&G. The OR/MS group has been consolidated and is now 12 to 15 people and growing. The group's credibility within the organization remains high with many vice presidents as clients. The OR/MS group has been involved in influencing strategic decisions in project portfolio management and influencing key initiatives that the company is undertaking, as well as in marketing analyses and supply chain management. The Edelman work led to a renaissance of OR/MS at P&G with OR currently involved in supply chain management and the evaluation of e-commerce opportunities, and this is expected to continue.
... and There is Some Bad News.
Despite the economic value claimed for these applications at the time of implementation, not all have prospered or have led to a sustained interest in OR/MS in their firms.
L.L.Bean's Edelman entry on call center optimization reported benefits of $10 million annually achieved at a cost of $40,000, for an estimated annual rate of return of about 25,000 percent! This is the highest rate of return that we have found for OR/MS work. It would be nice to report that this level of success had spawned an active OR/MS presence in L.L.Bean, but we could find no evidence of this. Bean has apparently purchased a few bits of optimization software for the retail operation. The company is doing a bit of forecasting and capacity planning at the call center and there are some localized operations efforts. However, we found no evidence of OR/MS playing any kind of a role in strategic decision making, or any signs of corporate involvement in OR/MS.
The Kodak (Australiasia) photographic paper optimization application produced all of the expected gains in productivity and savings for about five years and was implemented in the Canadian plant where it was used for about four years until that plant was closed and production moved to Rochester, N.Y. After approximately five years, the composition of the bulk photographic paper was changed, eliminating the different blends and dramatically reducing the need for the model. Although the application did spawn some initiatives in other product areas, the employees who worked on this were mostly IT people without experience in OR/MS, and management did not distinguish between an IT application and an OR/MS application. Over time, the interfaces became fancier, while the algorithmic content became more heuristic. There appears to have been at least one instance where an OR/MS simulation model was used for strategic purposes, but management has not developed any strong appreciation of OR/MS.
Perhaps the major disappointment among these firms is the decline in OR/MS presence in ABB. Dan Elwing, former ABB Electric U.S. CEO, was a major advocate of OR/MS, and the Edelman article reports a number of projects that appear to have had a major impact on the company. In particular, customer segmentation work in the electrical transformer market enabled ABB to enter a shrinking market and come to dominate it. ABB has survived but is a smaller company today than it was in 1995, and while ABB lists an impressive set of European scientific publications on their Web site (www.abb.com), we could find no sign of any OR/MS activity in ABB North American.
The Impact of the Edelman Success on the Firm's OR/MS People
We tried to ascertain the impact that achieving finalist recognition in the Edelman competition had on the OR/MS practitioners in these firms. We found that outstanding OR/MS work does not guarantee that the OR/MS group will survive. In 11 of 24 firms, the group has been split up and devolved throughout the firm into multi-functional groups. This finding parallels results presented by Fildes and Ranyard [Interfaces, Vol. 30, No. 5] from the United Kingdom where 22 of 99 identified OR groups closed between 1990 and 1997, but almost two-thirds of the staff from these groups were redeployed elsewhere in the organization.
A feature of this set of applications is the high representation of external consultants, particularly academics, among the authors: 22 of the 32 original articles have at least one external author. Clearly, this is not a random sample of all major, successful OR/MS projects, and the high incidence of academic authors may, in part, be explained by the requirements of the competition. However, the great majority (19 of 25) of these firms continue to rely on external consultants to provide their OR/MS expertise, although a good number report increased OR/MS staff levels (10 of 23) and capital expenditures related to OR/MS (10 of 21).
Some OR/MS people have argued that an early career in OR/MS is good preparation for a career in general management. It was, therefore, gratifying to find that 75 percent (9 of 12) of the firms where this issue was relevant (basically, a similar organizational structure with some of the same individuals still with the firm) had promoted at least one person from the Edelman project team to upper management.
... and on Management and the Firm
We tried to ascertain whether these very successful applications had changed the attitude of corporate management to OR/MS. Since we could only find 10 firms where we could be sure that the management sponsors of the Edelman work were still with the company, sustaining management's awareness of the value of OR/MS involved educating new management. Our contacts reported that management's interest in OR/MS had increased in 19 (of 24) firms, and in 21 (of 27) firms we were told that management was supportive of and appreciated the value of OR/MS.
The example of AT&T Capital Corporation illustrates success through persistence in a time of corporate change. AT&T Vice President Michael DiBernadi used consultants from AT&T Laboratories to develop their 1996 application on credit decision making, credit-line management and delinquent account management. When AT&T Capital was acquired by Newcourt Credit, DiBernadi approached Newcourt management who understood what the OR/MS team was trying to accomplish and agreed to hire them as full-time employees.
When CIT Group acquired Newcourt, DiBernardi had to explain to the new management what the OR/MS people did, and CIT management has responded by actively supporting the group. With strong support at the vice-chairman level, OR/MS is now penetrating new areas, including factoring, the consumers' business and the equipment financing business. Now, this seems to be an industry where the use of OR/MS is expanding and there are good opportunities for future work and future employment. If there is a downside to this story, it is the fact that the OR/MS group has not managed to expand beyond five people, so the model for the future is to outsource more work and use the internal people to be the guidance for these projects. There has also been some loss of OR identity, with the group now seen of as more an "analytics" group than an OR/MS group.
We found evidence in 14 firms that OR/MS was now a strong part of the corporate culture with a number of companies now talking about being "fact-based decision makers." Our contacts, most often people with connections to MS/OR, reported strong evidence of growth in the acceptance of OR/MS in 21 firms, and we concluded that there were now 16 firms where OR/MS was now considered critical to the firm's success.
Finally we were able to assess the competitive response to the Edelman work for 20 firms and found evidence of a clear competitive response in 17 cases. Most often, the response was an attempt to replicate the OR/MS work. In a number of industries, models of the type that featured in the Edelman competition are now a required technology. Well-known examples include the airline, rental cars and trucking industries.
Strategic OR/MS
Bell [1998] suggested that the primary impact of a successful strategy is that it creates a competitive advantage that is sustainable over a period of time. Following this thinking, he defined "strategic OR" as ...operations research that achieves a sustainable competitive advantage. The history of these applications suggests that several fit this definition of strategic OR. Tata Steel and National Car Rental provide two examples.
The very successful Edelman finalist project on optimizing resources at Tata Steel Company has led to OR/MS being used in almost all important aspects of management decision-making. This includes business plan formulation and monitoring performance against that plan, constrained resource distribution, make-or-buy decisions, calculating break-even prices, and short or immediate decisions that can be optimized.
The model from the Edelman article is not very relevant anymore because Tata Steel has gone from a power shortage to a power surplus, but the model has been used on occasion to manage the surplus situation.
The OR/MS department at Tata Steel was four individuals at the time of the Edelman article and has now expanded to 25 people in four groups: a planning and optimizing group, a data management group, a cost management research group and an analytics group. Despite the general trend toward downsizing in the rest of the company, the OR department has been allowed to expand at will, providing they find the appropriate individuals. Gopal Sinha, the leader of the OR group at that particular time, has been promoted to deputy general manager — number three in the management hierarchy after the board of directors. The culture of the company has changed toward an acceptance of OR/MS techniques.
Recently, Tata Steel won a gold medal for the most cost-effective steel plant in India. Last year, Sinha was invited to the Sloan School of Management at MIT to talk about how Tata Steel was using OR for top-level decision-making and Sloan suggested that they apply for an INFORMS award for using OR/MS at the highest level. The MIT people attributed Tata Steel's success to the way they are organized and their level of cost understanding.
Sinha considers his groups' greatest success to be the ability to build faith in OR/MS in top management. Initially, the CEO was not convinced that the company needed an OR/MS group, but after the success of the Edelman initiative he became a strong supporter. The CEO and top management are now completely convinced of the importance of OR/MS techniques and this has led to entrusting many other initiatives to the OR/MS group.
Tata Steel has not noticed significant competitive reaction to their OR/MS initiatives. Sinha attributes this to the weak economic situation for steel plants in India during the economic recession of the last two years. Tata Steel was in economic surplus despite the recession — they see this as a direct result of their optimized decision making.
Talus Solutions Inc. (then Aeronomics) partnered with National Car Rental to develop the revenue management application that was the Edelman Award finalist. National has since merged with Valu and Alamo into one parent company, Autonation.
At the time of the article, National had no OR/MS department but there was a dedicated RM group of 30 business specialists primarily made up of non-technical people. This group of functional experts executed, and was responsible for, the RM program. They are still in existence and have grown over time, especially with the merger of Alamo. During the course of the project, different people were brought in from other areas of the company to form this team, and the support groups were then organized around this department. All changes thereafter were consistent with this direction of the company.
The project was a resounding success and exceeded all expectations of National. The original system has been replaced with a more current system in order to continue to enhance their RM function to state of the art. National also had EDS do a major overhaul of the interface between their legacy systems and the revenue management system. They have continued to invest both personnel and monies in this area since 1994.
Currently, National has a small OR/MS department that deals with applications such as inventory management or scheduling, and acts as a support group for RM. The pricing and RM department (a specific application area that brings IT, MS and BPR all together to form solutions) is substantial. National also contracts with Talus for support on revenue management.
Revenue management and OR/MS have increased in stature as peoples' faith has increased in the forecasting and optimization that are part of that system. Management recognizes and is very appreciative of RM, and it has become vital to the culture of National. These activities are critical to the success of the firm and have spread in acceptance throughout the firm. People from the RM group are involved essentially in all aspects of the business — financial planning, marketing, advertising, fleet acquisitions and disposals, and have been promoted. For example, if f you had watched the National Car Rental PGA golf tournament on television last fall, you would have seen an interview with Ernest Johnson, formerly VP of RM, and now president of the National Group. The RM experts have embraced OR/MS and made it a part of their work culture. This is true throughout the industry. All the major airport car rental companies now practice revenue management.
The success of the project at National also resulted in tremendous success for Talus within the industry to the point that they have the bulk of the industry as their clients. Talus is also involved in travel and hospitality, cruise lines, hotels, airlines and broadcasting. They are now applying these principles to price settings in all industries (not just perishable assets) including auto manufacturers.
Recently Talus was acquired by supply chain specialist Manugistics in a deal worth $366 million at signing. Manugistics is using the newly acquired Talus' capabilities to launch Enterprise Profit Optimization, the integration of supply chain optimization and RM.
Conclusions
The Edelman competition was launched to showcase the most innovative and effective applications of OR/MS. It has done that. The majority of the Edelman finalist applications published from 1990 to 1997 are still in use and several have been recognized by senior management as having created a sustainable competitive advantage for their firms.
Our research also suggests that being an Edelman finalist can be a powerful internal marketing tool. OR/MS workers who have achieved the Edelman competition finals generally enjoy a high level of corporate acceptance and support for their work, and have continued to prosper in the years after the competition.
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References
- Fildes and Ranyard, Interfaces, Vol. 30. No. 5.
- Bell, Journal of the Operational Research Society, No. 49, Vol. 5, p. 381-391.
Peter C. Bell (Pbell@Ivey.ca) is a professor at the Richard Ivey School of Business, University of Western Ontario in London, Canada. He is a former president of IFORS (1995-97). His company, Strategic Management Science, Inc. (www.strategicmanagementscience.com) publishes Strategic MS/OR News, a monthly e-newsletter reporting on important developments in the practice of MS/OR. Chris K. Anderson is a doctoral student at the Ivey School who has accepted an appointment as an assistant professor, Management Science and Information Systems, at Ivey. Stephen P Kaiser is a recent graduate of the Ivey MBA program.
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