Sunday, 19 October 2008

Operations Research Economics



I seem to be one of the OR-bloggers that didn’t attend the INFORMS DC meeting. Sorry for that, I would have liked to meet all that did attend but I was too busy. With the current economical developments in which governments spent billions to save banks from falling over, also my clients call me in distress and ask for support. This seems weird since, in times of economic distress, companies tend to reduce spending money on external consulting, but it seems that OR consulting is the one type that companies much like to spend money on even when things get rough.

When the economic mills slow down or even stop, companies face a lot of difficult questions. One of the most important ones is how to keep business profitable and shareholders happy; cost cutting is thought to be the best option because it is a powerful instrument to still make a profit with deceasing revenues. But cost cutting is also very destructive; it will destroy future capabilities and can ruin lives of employees. In times of economic prosperity the focus on costs, building a lean and mean operations, is not the first priority of management. That results in a lot of fat in the origination that can be removed by operating more efficiently. The challenge for the OR professional is to find that the best optimisation diet to revive profitability with the lowest impact on the operation.

In the past years I have been consulted by many different companies to support them in deciding how to best address the consequences of an economic slow down. They wanted to know were to close down factories, which products to stop offering, how to be more cost efficient, even who to lay-off. The last one certainly wasn’t easy. As an OR professional you can’t decide what is the best action to take; that is the responsibility of the company itself. In situations in which I was asked to suggest the best decision, I always tell the company that I can show them the impact of the various options, but they have to make the decision.

Most of the times the questions raised have to be solved on a very short notice. The stock market annalists are waiting for action and they want it fast. For all stock market listed companies this means less than three months of time to get results, since every quarter an update to the shareholders must be given on the financial soundness of the company and the plans for the future. The projects executed to regain profitability are of high strategic importance and were executed in or very close to the boardroom. This brings operations research professionals were they should be, at boardroom level. Many times I was surprised to see that CEO’s and the like know so little of the added value an Operations research professional can offer them.

So, even though the economy is coming to a stand still, I still am very busy. A job in the OR consulting business therefore is probably the best hedge against unemployment. In times of prosperity companies hire you because the have money to spent to work on ideas they have on expanding their business. In times of economic distress they also hire you, to find out the best strategy to keep them in business.
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